Dodging volatile equity markets

With equity markets down 700 points in the past two trading sessions, retail investors have been getting jittery. With volatility since November last year, rating agency Standard and Poor’s (S&P) downgrading of American government debt firmly sets a sombre tone. The Sensex and Nifty have each lost almost 7.5 per cent in the past week.

It is part of a trend. In the past six months, both indices have lost about six per cent. In the past year, the Sensex has fallen by five per cent and the Nifty by four per cent.

Even mutual fund investors are sitting on huge negative returns. The top 10 equity schemes this year have registered a loss of eight to 25 per cent since the start of this year. According to Value Research, the mutual fund rating agency, HDFC Top 200 has given minus 11 per cent year-to-date, Reliance Growth nearly minus 15 per cent and Fidelity Equity minus 11 per cent, as on last Friday.
 

PLAYING IT SAFE
	Returns (%)

1-mth3-mth6-mth1-year Sensex-7.68-4.97-6.39-4.77 Nifty-7.47-4.55-5.91-4.33  1-year
returns (%) Gold34.05 Silver101.29 FMPs8.15 Equity mid- & small-cap funds-5.55 Equity multi-cap funds-5.23 Equity diversified funds -3.83 Source: BS Research Bureau

The advice from market experts remains the same. It is not yet time to press the panic button. Dinesh Thakkar, chairman, Angel Broking, says there is decent upside in the markets for a long-term investor. "Markets could be recalibrated a little lower, since growth prospects in the near term look a little weaker. Global problems add to near-term uncertainty, which will lead to rangebound movement in the near term," he adds.

WHAT TO DO?
So, while investors are asked to stay put in equity investments, 30-40 per cent of any surplus should go into equities, as every fall in the market is a buying opportunity.

The rest, experts suggest, should be invested in fixed income instruments and gold. Reason: To protect the downside. With interest rates rising, bank fixed deposits are the most lucrative. State Bank of India is offering 7.75 per cent for one year and 9.25 per cent between one and 10 years. ICICI Bank is giving 7.5 per cent for one year and anywhere between 8.25 and 9.25 per cent from one to 10 years.

The option is debt mutual funds. “You can park surplus money in shorter duration (three to six months) debt funds, as interest rates may rise further. Therefore, stay away from medium to long-term debt funds,” says Hemant Rustagi of Wiseinvest Advisors. Choose a debt fund based on your investment horizon and liquidity requirement. Typically, you can pick ultra short-term funds, where the returns are in the five to nine per cent range, for a horizon of three to six months. One could also look at short-term funds which offer returns in the range of five to nine per cent for at least six months and fixed maturity plans (FMPs), where returns are in the eight to nine per cent range for a year. The other advantage with FMPs is that these are tax-efficient.

GOLD
The other safe haven is gold. In the past year, gold has given back 34 per cent and 100 per cent since the 2008 economic slowdown. The price of gold price has already risen by 20 per cent in 2011 and with the US looking downhill and market uncertainties, the demand for the metal could continue pushing it up.

Traditionally, financial planners advise investing five to 10 per cent of the portfolio in gold. According to Kishor Narne, head-commodities, Anand Rathi Securities, given that gold prices are near an all-time high, the returns from it may not be phenomenal (maximum 15-20 per cent). “Over the next year, this instrument will serve more as a safe haven for investments,” he says.

Investors, both new and existing, seeking to invest in gold should have an investment horizon of six to eight months. Naveen Mathur, associate director, commodities & currency, Angel Broking, advises investing in tranches over a period of time, as the yellow metal may see a correction any time. You can invest through gold savings funds or National Spot Exchange’s e-gold, as these offer systematic investment plans.

However, financial planners also give a caution: the gold trend may reverse once the global situation improves. In which case, money will flow out of gold to equity. "Buy gold only for two reasons right now, for consumption or to trade for short-term gains from momentum. Otherwise, gold should form five to 10 per cent of the portfolio,” says certified financial planner Arnav Pandya.

Despite giving the highest returns in the past year, investments in silver are not recommended for retail investors, as it is a 'high beta' or volatile commodity. If the global crisis worsens in the near term and gold moves up further, silver is expected to touch Rs 62,000 a kg, says Mathur.