Another year is going by and we all are ready to welcome the New Year 2020. The start of the new decade will see Mitraz reaching and celebrating an important milestone – a decade long existence since 2010.

The Year 2019 started with high expectations about market recovery which were further elevated after a bigger mandate for BJP in Lok Sabha Elections in May 2019. However, the euphoria was short-lived with budget dampeners, GDP falling to 4.5% during July – Sep quarter and high unemployment. The debt crisis and the NPA skeletons that came out of the closet took everyone by surprise and continued to depress the market and the investor sentiment. The BSE Mid Cap and BSE Small Cap have lost -2.94% and -7.57% respectively since Jan 1, 2019. From Jan 2018 to Oct 2019, 85% of the stocks in 500 Cr to 8000 Cr market cap category gave a negative return and 65% of the stocks above 8000 Cr market cap are down. This shows how narrow the market rally has been and how few stocks have driven the BSE Sensex performance in the last two years. It is not surprising that most investors have seen their portfolios underperform significantly despite BSE Sensex gaining 14.63% this year.

So, how does one deal with prolonged market underperformance? The Securities and Exchange Board of India (SEBI) recently sent out a circular to all the Investment Advisers about Proper Risk Profiling. I am reproducing the text of the SEBI circular.

"Proper risk profiling and consent of client on risk profiling

Risk profiling of the client is essential to provide advice on a suitable product based on various criteria like income, age, securities market experience etc. RIAs shall provide investment advice only after completing the following steps:

1.  Complete the risk profile of the client based on information provided by the client.

2.  Obtain the consent of the client on completed risk profile either through registered email or physical document."

Risk profiling is one of the most important parts of Risk Management. Since the time we started, we have instituted risk profiling through a set of questions and regular conversations with our clients. At times, it may seem onerous and perfunctory to fill the questionnaire, but your risk profile sets the investment policy and rules between you and your Adviser. The risk profile is a function of your personal situation and does not change with the market momentum. If you have experienced a change in your outlook from Aggressive in 2017 to progressively Conservative in 2019 then we should revisit your risk profile and investment strategy in the long term. Risk and Return are two sides of the same coin and cannot be separated. To reiterate, higher risk means higher volatility of returns. Your risk profile determines the level of volatility you are comfortable with. Please ensure with your Adviser that your Risk Profile is always relevant based on your latest personal circumstances.

So, what can you expect in 2020? While the BSE Sensex is an all-time high, the BSE Mid Cap and BSE Small Cap are beaten down with returns of -16.06% and -29.21% respectively since Jan 1, 2018. Mitraz has managed the risk in the last 2 years by maintaining a higher allocation to Liquid Funds and increasing Equity allocation through Systematic Transfer Plan (STP). The corporate tax cut earlier this year have presented opportunities in Large-cap stocks which we have included in our Satellite portfolio. Our expectation is that the Government will have a budget in 2020 to stimulate growth through infrastructure investments and possibly personal income tax rates cut. The divergence between the Sensex and the Small Cap indices is quite high right now like 2013-14 which led to the recovery of Small-Cap in subsequent years. See the chart below. We believe there are opportunities in Mid Cap and Small Cap Funds but want to carefully increase the allocation through STP. Please talk to your Adviser for specific actions on your portfolio and investments.

During the year, Mitraz further strengthened the Risk Management process. Prudent risk management will let your portfolio weather rough storms, no matter how long. Maintain the Investment discipline, Be Patient.  I want to end this note with Warren Buffett quote, "The stock market is a device for transferring money from the impatient to the patient".

Wishing you and your family a very Happy New Year 2020,

The writer is the Managing Director of Mitraz Financial Services Pvt. Ltd and can be contacted at micontact@mitraz.financial