In times such as now, equity allocation needs to be increased. One could also look at other options like FDs.
One may expect equity investors to be aware of the markets’ being subject to volatility. Volumes have been written about how a long-term strategy should see one’s equity market investments rise even in a volatile market. So, it would be reasonable to expect those with a clear time horizon and goal-oriented investments to do well. Let’s take a look at what investors could do in situations like now, where the markets have drifted downwards and are now staying in a range.
HOLDING ON TO EQUITIES
The worst thing would be to cash out one’s equity assets. Typically, investors get in when the markets are trending higher. There are lots of fence sitters when the markets are rising. It is when the markets have run up almost to the top that the stampede to get in begins. That’s the wrong time.
Again, when the markets have started sliding, investors want to sit out the slump. But they suddenly lose their nerve when markets go down the tube, on a continuous losing trend. At some such point, a stampede starts. They just book their losses and exit out, costs be damned. Most people don’t look at the market at all till there is a frenzy again.
By the asset allocation principle, one would need to commit more money to equities at present, as their values would have eroded and they’d have a smaller share in the asset allocation pie. Hence, equity allocation actually needs to be increased. Though it may be a gut-wrenching decision at this point, it will prove a winner over time. Even if one is not doing that, one could at least wait out this slump.
One should continue with Systematic Investment Plans (SIPs). Customers want to know if they should stop SIPs at this point, since the markets are down. On the contrary, all purchases done in this period through SIPs would help the investors get a higher number of units, ultimately helping them when the markets turn for the better.
Running after gold, as it is giving exceedingly good returns now, is also not advised. Gold is going up due to speculative activity. Gold exchange traded funds (ETFs) worldwide are collecting huge corpus and buying gold to be kept in their vaults. There is no productive use for this gold. It is just that there is a widespread expectation that gold will trend higher. It could do so, but this is speculative activity. Due to currency debasement and uncertainty in the world, gold is a comfort investment. Keep it that way. Invest between five and 10 per cent of your corpus in gold and other precious metals, through ETFs or similar options, instead of direct physical investments. Physical investments have additional costs and are also subject to wealth tax. Silver had already shown what can happen when there is massive speculation – it dropped 30 per cent in three days, when higher margins were imposed.
For those who invest in stocks, they could look at picking defensive themes like fast moving consumer goods, pharma and so on. The profitability of companies is coming down. In such situations, large market capitalisation companies and others with leadership positions in their industries could be good bets. Such companies have better pricing power and ability to weather the storm. If investments are through mutual funds (MFs), schemes investing in the above areas would be good bets.
For those with a long time horizon, of three to five years and beyond, mid-cap and small-cap companies would be good picks, as their prices are beaten down and offer good valuations now. If the goals are long-term, these investments could be a good idea.
For those wanting to put in a large sum of money in equity assets, they could break up the money and invest over time to take advantage of market fluctuations and spread their risks. In case of MF investments, these can be done in debt funds and can be transferred to appropriate equity funds over time.
OPTIONS
Volatility in equity markets often results in retail investors looking at other available investment avenues. For fixed income investors, fixed income monthly plans (FMPs) are a good idea. The underlying investments in FMPs, viz corporate paper (CPs) and corporate deposits (CDs), are now offering over 10 per cent returns.
If a person is in the dividend option, they could get 8.6 per cent or more returns, post-tax.This is attractive and is well above what the Public Provident Fund (PPF) offers. Best of all, this comes in an FMP with just over one year duration. There are bank fixed deposits (FDs,) company FDs and bond offerings which are attractive, too.
There is another excellent option before retail investors. Since the interest rate cycle is more or less at the peak and is expected to taper in about six months, there is potentially money to be made by investing in government securities - the G-sec funds which will give very good returns when the markets turn. Other funds holding corporate paper can similarly give good returns. Or, one could invest in dynamically managed debt funds, which a fund manager would manage and time the entry and exits of various investments, which is critical here.
Predicting the direction of the market is fraught with danger; even experts can’t do so. Taking a long-term view and investing and taking advantage of the present situation is the wise thing to do.
The writer is a certified financial planner
