The economy continues to look down cast with various indicators coming out
looking decidedly bearish. The IIP numbers, Purchasing Managers Index,
Inflation, GDP number etc., leave much to be desired. In the sea of misery,
there is one redeeming ark – the trade deficit has narrowed sharply, which is
possibly the only good news. Another one – the monsoon has been good and is
expected to boost the rural incomes.
Stock markets have been buffeted by the falling rupee & the exit of
money by FIIs. Equity markets have been affected & how! Among this, the mid
and small cap stocks have seen massive erosions, some of them as high as 95%!!!
Consequently, mutual funds have also had their rough patch. They have
fallen less due to diversification & fund manager actions, that inherently
is one of the strong suits of MF schemes.
The sour point now is that even the debt markets have turned turbulent due
to RBI actions, which have effectively increased the borrowing costs for the
banks. All this has put a question mark
on what we need to do now. That is exactly what I’m writing for.
What do you do now ?
1. Equity - One of the frequently asked questions
is whether the Equity SIP should be stopped.
The short answer is – No.
Equity SIPs are done with a longer
investment horizon for meeting future goals. Also, the best way to invest in
equity assets is through small monthly investments which does away with the
need to time the markets & ensures cost averaging ( apart from various
other pluses ). Hence, stopping the existing equity SIPs is not a sound idea.
As far as the existing equity
investments are concerned it is better to stay put rather than change anything
at this point. When the markets are in a tizzy, it pays to go by the dictum
which stood our past PM ( Narasimha Rao, who was the first one to anoint it
with ceremonial honours !) in good stead – No action is also action.
In due course, the markets will calm
down, when the effect of the corrective action being taken, bears fruit.
2. Debt - After the shock treatment meted out by
RBI, investors are skeptical about the debt markets too. But look at the other
fact – RBI cannot keep the interest rates this high and will have to reverse it
sooner than later, if it does not want to as the chief architect of a crippled
economy.
Hence, the direction will reverse and
the interest rates will come down. The current losses in the debt funds are due
to the Mark to Market losses. That will turn to mark to market capital
appreciation when the direction turns. That should be sooner than later. So,
the fall in NAV seen now is purely temporary and will reverse and start giving
profits in time. Hence, if as an investor, you stay invested, you may actually
reap rich rewards in future.
Since, the medium & longterm debt
funds, including Gilt funds have fallen now, the intrepid investor has a chance
to get in now and ride the interest rate south side movement. This ofcourse has
some risks as no one can predict exactly how the markets are going to unfold in
future. RBI itself was not expecting the sharp yield spike in Gilts.
3. Does one move from Equity
to FD/ property/ Gold? That seems like a
logical thing to do. But the wrong thing to do!
Just because equity is doing badly now ( and has been doing so for the
past five years ), you cannot write it off. You could, if you are going to
write off India itself. Equity has performed in the past and it will in future
too.
Moving from Equity to another asset
class now will ensure that your loss or poor returns becomes real ( instead of
notional ). Now if you invest in FDs, it could give stable returns, but it’s
post tax returns cannot beat inflation. Moving it will look really silly once
equity starts to move up. Equity movement can be meteoric after periods of languid
meandering. Patience pays.
Property investments should be done on
merits. Prices have gone up in the real estate markets quite sharply, for 7-8
years now. The upside can be modest. The probability of a downside or low
returns on investments is a distinct possibility. Invest if you are convinced
that you are getting a bargain.
Gold is dicey. The gold prices have
gone up due to rupee depreciation & the import duties. In dollar terms it
has actually gone down. If one were to look at the past year, Gold has moved
from around $1,650 ( Sept 12 ) to an ounce to $1,370 now.
4. That brings us to the
concept of asset allocation. Investors need to decide what their goals
are and to achieve their goals, what kind of asset mix is required. This has to
be carefully chosen after due consideration for risk, return, tenure,
liquidity, taxation etc. Stay invested based on that asset allocation. Every
asset will not give good returns, at every point. But every asset has a role to
play in the portfolio. We cannot expect to flit like a butterfly from one asset to another and expect good
portfolio returns. In fact retail investors are more known for entering at the
end of a bull phase ( like say property ) and exiting in the middle of the bear
phase ( like say equity ). Some tactical allocations can be done to take
advantage of the prevailing situation; but this can be on just 5-15% of the
portfolio.
5. Opportunities – Fixed Maturity Plans (
FMP ) has the potential to offer between 9 -10% post tax returns, based on the
yields of the underlying instruments for tenures between one to three years.
For those who do not want interest rate risk, this is an excellent instrument.
Those with a higher risk appetite should wait it out in debt funds.
Lots of equity funds have been beaten
down. The best way forward is to keep
the SIPs on. The more daring approach is to invest in equity assets now. That
ofcourse is not for everyone and is to be attempted only by those having a high
risk appetite.
6. Caution – Do not assume any
liabilities at this point when the economy is in doldrums. Keep the expenses down. Postpone any capital
purchases. Don’t try anything fancy. Don’t keep seeing the prices of your
investments daily. It can give you ulcers & hypertension. Just stick to
your routines.
When you are in quick sand you go down
faster if you move vigourosly. Bring forth your survival instincts. Things are
currently bad. But in every situation, the results are based on how you react
& take advantage of the situation. That alone separates the men from the
boys. Go ahead, earn your stripes!
Author - Suresh Sadagopan | www.ladder7.co.in
