Current Market Situation | What Should An Investor Do?

Like many of you I have been watching the current market developments. The purpose of this posting is to share my market views with you in a Q & A format. Hope this helps. If you have any other queries, please do email me and I shall try to address them to the best of my knowledge. Before going to Q&A, just would like to request you to be calm and not get panicky over the current developments. The chances of a calm and composed person surviving a tsunami is better than a jittery person. With no offense meant to market experts, the markets defy all logic and rationality many a time and the best of experts are unable to find a pattern in the market movements. In that sense dont be obsessed with the print / visual / internet media. Instead, stick to basic tenets of investments like having a goal based financial plan with proper asset allocation based on your risk appetite. Fortunately most of the very important things in life are simple and let us approach the current situation also in a simple and wholistic manner. All the best.

Q Why are the markets correcting?

A Some of the reasons for the market correction include

• International factors like US Debt Crisis, US Rating Loss, possibility of a US economy re-rating, Fear of double dip recession, Europe crisis mainly from PIIGS countries referring to – Portugal, Italy, Ireland, Greece, Spain, etc.
• Domestic Factors like inflation – interest rate hikes – monsoon concerns – corporate profitability concerns – fiscal deficit – current account deficit – scams, etc

Q Most economists say that India is one of the few countries in the world with 7% + GDP growth rate. Still why should markets correct?

A Yes, Undoubtedly India remains as one of the few long term sustainable growth stories in the world. The long term India growth story is intact with its favourable demographics and income growth. Yet the stock market movements are not always governed by long term factors. Equity Markets in the short term tend to be volatile and factor more of current concerns as briefly mentioned above.

Q What does it mean to the investor? How should he react to the current market situation?

A Fortunately, the long term wealth creation rules have always been simple and will continue to be simple. Keep reviewing your asset allocation regularly based on changing life situations.

• Get your risk tolerance level properly profiled and have a proper financial plan with asset allocation in place.
• Invest long term money in equities.
• Medium term money in a mix of equity and debt.
• And short term strictly in debt.
• Don’t forget to have an emergency fund covering atleast six months of your family living expenses and loan payments.

Having done the basic financial planning exercise, If you are underweight in equity, use the current market situation to increase the equity allocation. If you are over invested in equities, and the portfolio is in deep red, don’t panic. As a first step, run a portfolio check with a reliable advisor and see how best you can rebalance the portfolio to discard the laggards [reduce concentrated bets] and increase allocation to performing stocks and funds.

Q Should I Invest lumpsum in equity funds now?

A Targeted amounts can be parked in liquid funds and 25% of that can be moved to identified equity funds at current levels and remaining over a staggered period of 3 – 6 months. And intermittent markets dips can be used to speed up the transfers. Systematic Transfer Plans and Systematic Investment Plans would help in this regard. Simply putting money into the market at regular intervals allows you to smooth out the highs and lows of the market. Sometimes you’ll get in near the bottom, sometimes you’ll get in near the top, but you’ll be in — and that’s the most important criterion for long term wealth creation. It’s not great rocket science, but it makes the most sense for most investors.

Q I am looking for capital protection investments with a time frame of one year. What should I consider apart from bank fixed deposits and instruments that are tax efficient.

A

• Fixed Maturity Plans [FMP] would be useful in this regard to overcome interest rate risks and to get decent post tax adjusted returns. Note that exit options are minimal for FMP’s. Also note that the DTC (Direct Tax Code) is due to be implemented from April 2012. If it is implemented in the current form, FMPs will not have any special tax advantage.
• So, if you looking at capital protection with liquidity, you can also consider some short term income funds with good YTM [Yield to Maturity] and duration of around 1 year. Here you have an upside potential in the sense that if the interest rate reversal happens during your investment period, the returns can be in double digits. On the flip side, if the interest rate continues to go northwards, there could be sub optimal returns. Again most of these funds have exit loads for varying periods. Check with your advisor for fund specific info.
• And if you are looking for capital protection with liquidity and no exit loads, consider money market funds. Currently they offer close to 8% annual returns. These are superior options to your idle money in bank savings account / current account.
• Regarding Growth/Dividend Options, if you are in higher tax brackets it makes sense to invest in dividend reinvestment option to optimize on tax front.

Q I am an aggressive investor and would like to know which sectors look attractive?

A FMCG,Health Care/Pharma sectors are considered defensive since these expenses are normally not deferred. But the current valuations of good companies in these sectors are quite high and there is a risk of over valuation and subsequent erosion in their values if the earnings of these companies do not increase commensurately. But for long term portfolios, these sectors could add value. Another sector is banking. When an economy like India grows, certainly the banking sector need to grow. On the market cap side, for aggressive investors quality midcaps offer a good investment value.

Q Is it Time to Time the Market?

A Trying to time the market is a self-defeating endeavor, so don’t be fooled by the stories your friends tell you. They may have gotten lucky once or twice, but over the long haul, market timing is a recipe for subpar returns. And that’s before the transaction costs and taxes. Remember the good old investment maxim. Time in the markets is more important than timing the markets. Back testing shows that SIPs give optimal returns in all market conditions in the long term, compared to lumpsum investments. Especially, SIPs help in reducing losses when the markets are downward / volatile.

Q When To Sell?

A knowing when — and how — to sell is one of the most difficult investing decisions you have to face. It’s much more difficult than deciding whether to buy a particular stock or fund. Key criteria you should use when determining whether you should sell would be

• Valuation Concerns
• Better opportunities
• Wrong investment thesis

Disclaimer

Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the schemes or that the schemes’ objectives will be achieved. Any investment program in securities may be volatile and can involve the loss of principal. No assurances can be given as to the accuracy of market predictions. Information made available here is purely as a measure of facilitation. While every effort has been made to ensure that the information given is correct, the author does not hold himself liable for any consequences, legal or otherwise, arising out of use of any such information. In view of the individual nature of the product features, tax consequences, etc., you are advised to have detailed professional consultation before taking any decision for action on the basis of information provided here.