Indian investors have had an on-off relationship with equity and equity-related funds. In spite of that, there has been a marked change in the way investors perceive equity funds today. The heartening thing is that an increasing number investors are now following a disciplined approach to invest in this volatile but potentially most rewarding asset class in the long run.
Many equity fund investors are facing a dilemma today. The indifferent stock market performance over recent years has begun to test their patience. Many are wondering whether it was a good decision to invest in equity funds, especially at a time when a debt option like a Fixed Maturity Plan (FMP) offers handsome returns. Then, there are those who invested at the peak of the market in 2008, and disappointed with the poor returns, are now looking to exit at an appropriate time. If you are one of them, don’t take any hasty decision.
The question on every equity fund investor’s mind is: how long is the stock market likely to remain subdued? Factors such as slow economic growth, currency fluctuations, government’s inability to carry out big ticket reforms and widening fiscal deficit indicate a recovery may not happen any time soon.
The recent announcement by Standard & Poor’s (S&P) to cut its outlook for India from stable to negative would further add to the woes.
Although all these factors point towards a bearish stock market in the near term, foreign institutional investor (FII) inflows and some positive developments on the economic and political fronts hold the key to long-term prospects of the market. The Reserve Bank of India (RBI) has already initiated the process of reigniting economic growth by slashing the repo rate by 0.5 per cent after a gap of three years.
While it is natural to get affected by a prolonged period of uncertainty, your ability to tackle it would depend on your mindset and preparedness to deal with such a situation. If you invest in equity funds with a clear time commitment and objectives in mind, it becomes easier to remain focused on the end result.
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Besides, if your exposure to equity is in line with what you can afford emotionally and financially, you are not likely to get too perturbed by the ups and downs. Therefore, a goal-based investing strategy can help you go a long way in ensuring you benefit from the true potential of this asset class.
In any case, don’t allow these intermittent periods of uncertainty to impact your chances of successfully achieving your long-term investment goals.
While continuing your investment process, irrespective of the market condition, is the key to long-term success, getting tempted to invest a lump sum in a falling market to benefit from ‘averaging’ may expose you to a much greater risk.
Making investment an on-going process, rather than a one-time activity, helps as short-term fluctuations tend to smoothen out over the long run. Therefore, you must avoid following a haphazard approach to realign the portfolio amidst volatile periods.
This is also the time to have a close look at your debt portfolio. Following RBI’s move to slash the repo rate, a number of banks have reduced their deposit rates. More banks are likely to follow suit. Similarly, FMPs too, are likely to offer lower returns.
However, FMPs remain a good bet for some more time if you are sure about your time horizon and don’t want to take any interest rate risk on your debt investments. Short-term bond funds can be a good option if you have a time horizon of a year or so and would not like to lock in your money. Considering the volatility risk, income funds should be considered only if they suit your risk profile.
The 10-year benchmark bond yield has surged to 8.63 per cent from 8.2 per cent on February 29. Therefore, it is advisable to have restricted exposure to income funds.
The writer is CEO, Wiseinvest Advisors