 "Sentiment isn't everything")
Financial planner Suresh Sadagopan is having a tough time convincing clients not to rejig their portfolio in favour of equities. "We are consistently stopping clients from going overboard on equities. There is no point in changing asset allocation now when things haven't changed remarkably on the ground," he says.
It's not only Sadagopan. All financial planners are facing the same predicament. Clients, who had missed the initial rally, suddenly feel they need to be in the stock market or book profits and buy a new car or any expensive goody. After all, it's been six years since investors and consumers felt so confident. Everyone just wants to grab this opportunity. The sentiment, of course, has changed dramatically. With the Sensex hovering around 27,000 levels, despite the recent correction, there is no shortage of positivity in the market.
But a lot of things are yet to change at the ground level. For the economy to improve, there are several factors that need to come together. For example, the Consumer Price Index has to come down substantially. It is still strong at 7.8 per cent, as of August. Till inflation comes under control, the Reserve Bank of India (RBI) is unlikely to go for rate cuts that will help the industry raise funds cheaply. The 10-year G-sec yield has fallen just marginally from 8.61 per cent to 8.51 per cent, clearly indicating that the market does not believe that interest rates are coming down in a hurry. Says Arun Kejriwal, director, Kris Securities: "Though the belief is that the RBI's stance is neutral with a downward bias, everyone knows that there is still time before inflation is reined in which, in effect, will delay the rate cut." In such times, it is better to be cautious than be over-exuberant.
As A Balasubramanian, Chief executive Officer (CEO), Birla SunLife Mutual Fund, says: "It does not make sense in being underweight on equities now. But asset allocation is important as well." One mistake which most investors make when markets are on a high is that they put a large lump sum in the market or a particular stock or mutual fund. If things go bad after that, they are unable to recover even their principal for long periods and rue the fact that they ever invested in the stock market. For example, many stock market investors in late 2007-08 invested lump sums and were stuck till early this year when the market gave them even 10-15 per cent incremental returns. Then, they exited in a hurry. According to financial planners, this strategy is bad, plain and simple.
"Investors need to put in both lump sum and some money through systematic investment plans (SIPs). If you have Rs 1 lakh and are investing another Rs 5,000 monthly, it is a good strategy because even if the market falls, the value of the lump sum will fall but SIPs will ensure there is cost averaging happening," says Hemant Rustagi, CEO, WiseInvest Advisors. He suggests that if you have only Rs 1 lakh, then invest 50 per cent in lump sum and the rest through SIPs.
Kejriwal suggests reining in expectations as well. "If you are investing for six months to one year, cap your expectations at 20 per cent annualised returns." He feels that the first test of how the economy is going will start from next week, when corporate results start trickling in. Though Corporate India has been growing consistently, if there is a shift in gear in terms of higher growth, things will start looking up.
Though most feel that the direction of the market is likely to be northward, there can be several external dampeners. Like the recent coal allocation decision of the Supreme Court has shown, the market can get shaken by these decisions. Global events like the US's interest rate hike or a geopolitical event can trip the market. So, it is best not to jump the gun and invest aggressively.
Don't start splurging
The latest iPhone6 might just be round the corner. But have you really saved for it? Or do you wish to swipe the credit card or take some equated monthly instalment option to buy it? If it is the former, then go ahead. Otherwise avoid. A common mistake is that consumers' pre-pone expenditure thinking that income will catch up.
'With things looking good, we will get a great hike next year and pay for these expenses'... A completely wrong approach. Credit card expenses have already been shooting up. According to RBI statistics, there were 399 million credit card transactions worth Rs 1.24 lakh crore in 2012-13. In 2013-14, the number of transactions is up to 512 million and the total value has risen to Rs 1.55 lakh crore. With the festival season round the corner, this number will only go up substantially. Clearly people are going overboard in their credit card expenses. With credit card companies charging as much as 36-45 per cent interest annually, it is best to avoid this route.
On the other hand, Sadagopan is already getting queries from clients who want to book profits and buy a car. He has made only one exception. "The client was very well invested and had planned for this new car last year itself. Otherwise, I am telling people not to overspend and overreach themselves."
Don't catch the mid-cap fever
Rustagi identifies a very typical investor behaviour when the stock market is doing well. "Investors look at the last six months, or one-year returns of mutual funds, select the top five and invest in these," he says. That's where one can go completely wrong. The top performing funds, especially in these market conditions, are most likely to be a mid-cap or a sector fund. Neither should form the core of your portfolio.
The equity mid-cap and small-cap category average returns are 86.60 per cent - the most - in the past year. But there is a wide difference in performance. The best performing fund returned 143 per cent, whereas the worst returned 44.81 per cent, according to data from Value Research.
If you are an investor entering the market for the first time or have been investing in a haphazard manner, don't start looking at mid-cap stocks or funds very aggressively. Aggression does not guarantee returns. Start with a good, well-diversified fund. "The important thing here is the holding capacity of the investor. Even if you are investing with a two-year horizon, there could be a situation when the market has sharply fallen, when you want to exit. So, it is important to ensure you are able to weather the turbulent period and hold on till things improve," adds Rustagi. At best, have exposure of 20-30 per cent in mid-cap, small-cap and sector funds.
Don't rush to buy gold
Though people were lining up to buy gold jewellery due to the Dussehra festival on Friday, it isn't the best time to invest in the yellow metal. On Friday, the yellow metal went below $1,200 per ounce for the first time since 2010. This is a critical number because gold production costs are pegged at $1,180-1,200 levels. Since July, Brent crude oil prices have fallen from $111 a barrel to $92 a barrel. When crude oil prices fall, gold prices also see a decline, as it indicates there will be a fall in inflation. Therefore, investors stop/reduce hedging against inflation by investing in gold.
But it is not an invitation to buy aggressively as well. According to analysts, gold prices will continue to be under pressure. Though gold prices are at Rs 27,300 per 10g now, many analysts feel Rs 26,000 is a strong possibility. As an investor, therefore, it makes little sense to buy gold now.
Yes, most believe that things will improve substantially in the months to come. As Balasubramanian says: "The current stability at the Centre is a plus and it will help in getting back economic growth. But people have to accept miracles will not happen over a period of time." Investment strategies or spending habits will have to take account of this ground reality and be cautious.
It's not only Sadagopan. All financial planners are facing the same predicament. Clients, who had missed the initial rally, suddenly feel they need to be in the stock market or book profits and buy a new car or any expensive goody. After all, it's been six years since investors and consumers felt so confident. Everyone just wants to grab this opportunity. The sentiment, of course, has changed dramatically. With the Sensex hovering around 27,000 levels, despite the recent correction, there is no shortage of positivity in the market.
But a lot of things are yet to change at the ground level. For the economy to improve, there are several factors that need to come together. For example, the Consumer Price Index has to come down substantially. It is still strong at 7.8 per cent, as of August. Till inflation comes under control, the Reserve Bank of India (RBI) is unlikely to go for rate cuts that will help the industry raise funds cheaply. The 10-year G-sec yield has fallen just marginally from 8.61 per cent to 8.51 per cent, clearly indicating that the market does not believe that interest rates are coming down in a hurry. Says Arun Kejriwal, director, Kris Securities: "Though the belief is that the RBI's stance is neutral with a downward bias, everyone knows that there is still time before inflation is reined in which, in effect, will delay the rate cut." In such times, it is better to be cautious than be over-exuberant.
As A Balasubramanian, Chief executive Officer (CEO), Birla SunLife Mutual Fund, says: "It does not make sense in being underweight on equities now. But asset allocation is important as well." One mistake which most investors make when markets are on a high is that they put a large lump sum in the market or a particular stock or mutual fund. If things go bad after that, they are unable to recover even their principal for long periods and rue the fact that they ever invested in the stock market. For example, many stock market investors in late 2007-08 invested lump sums and were stuck till early this year when the market gave them even 10-15 per cent incremental returns. Then, they exited in a hurry. According to financial planners, this strategy is bad, plain and simple.
"Investors need to put in both lump sum and some money through systematic investment plans (SIPs). If you have Rs 1 lakh and are investing another Rs 5,000 monthly, it is a good strategy because even if the market falls, the value of the lump sum will fall but SIPs will ensure there is cost averaging happening," says Hemant Rustagi, CEO, WiseInvest Advisors. He suggests that if you have only Rs 1 lakh, then invest 50 per cent in lump sum and the rest through SIPs.
Kejriwal suggests reining in expectations as well. "If you are investing for six months to one year, cap your expectations at 20 per cent annualised returns." He feels that the first test of how the economy is going will start from next week, when corporate results start trickling in. Though Corporate India has been growing consistently, if there is a shift in gear in terms of higher growth, things will start looking up.
Though most feel that the direction of the market is likely to be northward, there can be several external dampeners. Like the recent coal allocation decision of the Supreme Court has shown, the market can get shaken by these decisions. Global events like the US's interest rate hike or a geopolitical event can trip the market. So, it is best not to jump the gun and invest aggressively.
Don't start splurging
The latest iPhone6 might just be round the corner. But have you really saved for it? Or do you wish to swipe the credit card or take some equated monthly instalment option to buy it? If it is the former, then go ahead. Otherwise avoid. A common mistake is that consumers' pre-pone expenditure thinking that income will catch up.
'With things looking good, we will get a great hike next year and pay for these expenses'... A completely wrong approach. Credit card expenses have already been shooting up. According to RBI statistics, there were 399 million credit card transactions worth Rs 1.24 lakh crore in 2012-13. In 2013-14, the number of transactions is up to 512 million and the total value has risen to Rs 1.55 lakh crore. With the festival season round the corner, this number will only go up substantially. Clearly people are going overboard in their credit card expenses. With credit card companies charging as much as 36-45 per cent interest annually, it is best to avoid this route.
On the other hand, Sadagopan is already getting queries from clients who want to book profits and buy a car. He has made only one exception. "The client was very well invested and had planned for this new car last year itself. Otherwise, I am telling people not to overspend and overreach themselves."
Don't catch the mid-cap fever
Rustagi identifies a very typical investor behaviour when the stock market is doing well. "Investors look at the last six months, or one-year returns of mutual funds, select the top five and invest in these," he says. That's where one can go completely wrong. The top performing funds, especially in these market conditions, are most likely to be a mid-cap or a sector fund. Neither should form the core of your portfolio.
The equity mid-cap and small-cap category average returns are 86.60 per cent - the most - in the past year. But there is a wide difference in performance. The best performing fund returned 143 per cent, whereas the worst returned 44.81 per cent, according to data from Value Research.
If you are an investor entering the market for the first time or have been investing in a haphazard manner, don't start looking at mid-cap stocks or funds very aggressively. Aggression does not guarantee returns. Start with a good, well-diversified fund. "The important thing here is the holding capacity of the investor. Even if you are investing with a two-year horizon, there could be a situation when the market has sharply fallen, when you want to exit. So, it is important to ensure you are able to weather the turbulent period and hold on till things improve," adds Rustagi. At best, have exposure of 20-30 per cent in mid-cap, small-cap and sector funds.
Don't rush to buy gold
Though people were lining up to buy gold jewellery due to the Dussehra festival on Friday, it isn't the best time to invest in the yellow metal. On Friday, the yellow metal went below $1,200 per ounce for the first time since 2010. This is a critical number because gold production costs are pegged at $1,180-1,200 levels. Since July, Brent crude oil prices have fallen from $111 a barrel to $92 a barrel. When crude oil prices fall, gold prices also see a decline, as it indicates there will be a fall in inflation. Therefore, investors stop/reduce hedging against inflation by investing in gold.
But it is not an invitation to buy aggressively as well. According to analysts, gold prices will continue to be under pressure. Though gold prices are at Rs 27,300 per 10g now, many analysts feel Rs 26,000 is a strong possibility. As an investor, therefore, it makes little sense to buy gold now.
Yes, most believe that things will improve substantially in the months to come. As Balasubramanian says: "The current stability at the Centre is a plus and it will help in getting back economic growth. But people have to accept miracles will not happen over a period of time." Investment strategies or spending habits will have to take account of this ground reality and be cautious.