Mumbai-based mutual fund distributor, Prakash Thakkar, is busy fielding questions from anxious clients these days. Their query: Should they shift their entire investments in equity to fixed income instruments?
Most of these jittery investors had put in money just before the 2008 financial crisis and have not been able to make profits. “Many had started investing in 2007or early 2008 and fear losing more money in the present market,” explains Thakkar. Financial advisor, Hasan Wangde says this is especially true for big investments. One of his clients who had invested Rs 1 lakh in the last quarter of 2007 had lost up to 40 per cent. Today, his loss stands at 20 per cent in equity.
Changing asset allocation just because markets are not doing well does not work, says Rajan Krishnan, CEO of Baroda Pioneer Asset Management Company. “The other way is to withdraw from equity fund and invest in liquid funds for six months to one year, returning eight-nine per cent for protection of their capital. They can then shift to equity via a systematic transfer plan,” says Wangde. Given that debt funds have also been volatile, one needs to choose cautiously, he warns.
Take the opportunity in the present market to rebalance your portfolio. While the equity market has fallen, fixed income products have given very good returns (eight per cent and more). Say you invested a total of Rs 100,000 last year. Of this, Rs 70,000 is in equity, Rs 20,000 is in debt and Rs 10,000 in gold (returns = 45 per cent).
Further divide the equity part — 60 per cent, or Rs 42,000, in large-cap diversified equity funds (returns = -10.35 per cent), 30 per cent, or Rs 21,000, in mid- and small-cap funds (returns = -13.25 per cent) and 10 per cent, or Rs 7,000, in sectoral funds (banking, returns = -16.98 per cent). Similarly, divide the debt investments like this — 50 per cent, or Rs 10,000, in fixed deposits (returns = 9 per cent) and 25 per cent (Rs 5,000) each in mid- and long-term debt funds (returns = 6.21 per cent) and short-term debt funds (returns = 7.39 per cent).
The equity portion would be standing at Rs 50,058.90, debt at Rs 21,580 and gold Rs 14,500. Your total portfolio stands at Rs 86,138.90. You could book profits on debt and gold (Rs 1,580 + Rs 4,500) and move it to equity funds. Or, you could use the gains from debt to buy gold in small portion, if it is not already in your portfolio. “Don't look at equity performance in isolation, see your overall portfolio,” Krishnan advises.
Investors who have been investing systematically (via systematic investment plan or SIP), are not complaining, point out financial advisors. The reason being, SIP helps you buy at different market levels and, hence averages out and helps with compounding.
While markets are volatile, remember equities are available cheap. And, this asset class gives a high growth booster to your portfolio. Even if you are not buying, at least stay put, as equities yield better returns over a longer term (five years and more). Of course, your allocation towards equity is subject to your risk profile and investment horizon. Retail investors should always choose an equity diversified fund with long-term track record, preferably through SIP.
In 2007-08 the industry saw more investments in NFOs than in funds with good performance. This has caused many investors to book losses, said Naval Bir Kumar, president and CEO of IDFC Asset Management Company, on the sidelines of Business Standard Fund Cafe. Avoid NFOs, as these do not have a track record to gauge their future.
