Don’t Let Volatility Upset Your Goals

Should you stay put or make a quick exit from the market? The answer lies somewhere between the two options

Over the past couple of years, he has made lump sum investments in different funds. In addition, he has systematic investment plans (SIPs) running in a couple of large-cap funds. However, with the BSE Sensex touching 21000 and subsequently falling below 19000, investors like him are a worried lot. Political uncertainty, high inflation, higher interest rates are something that's worrying investors a lot these days. Investors are wondering if this factors will hit GDP growth and lower corporate earnings, causing the markets to fall further. So is this the right time to move from equities to debt or gold? Should investors shift from mid-cap and small-cap funds to large-cap funds? And like most mutual fund investors,

Worry Lines:

There are a lot of negatives worrying Indian investors. High inflation rates are eating into the savings of investors. Secondly, interest rates are spiraling all the way upwards, which could result in lower consumption across several products and in turn lead to lower corporate profitability. This could weaken valuations. While the sentiment is negative, there is no reason to panic. Stay put on your equity investments, and do not redeem or switch to debt. A lot of negatives are factored in the current prices. If globally things remain as they are, we could even see the markets move up by 10% by the end of the year. Do not resort to drastic measures like stopping your SIPs or selling equities to buy debt. Investors should continue with their SIPs as they can average your investments.

   At the same time, stick to the basic tenets of equity investments. Don't buy equities if you need the money a mere six months from now. Equity investments are volatile in the short term and hence investors should have a long-term horizon. It is important that the time horizon for equity investment remains a minimum three years. Secondly, have an asset allocation in place and follow it irrespective of a good or bad market. The current macro-economic environment does call for a cautious view as far as equity investments are concerned, going ahead.

   While high food inflation and interest rates remain the local worries, global worries surfacing again are a matter of concern. However, the the domestic consumption story is still strong. Over the long term, the India story remains intact, GDP is expected to grow over 8% for the next few years which makes India attractive in a world which has anaemic (low) growth.

Risk Profile & Goals:

The risk profile of every investor changes with time. It is a function of his financial goals and the closer he is to his goals. Hence, if an investor needs 9% p.a. on his portfolio to meet his goals, the allocation between equity and debt will be determined by expectation of returns in these categories. So, if equity will give us 12% p.a. and debt will give us 6% p.a., then the allocation will be 50:50. If, however, debt was to give us 7% p.a. and equity 12% p.a., the allocation required will be 60:40 in favour of debt. After this is done, goals that are approaching within 12 months for a younger investor and within 24 months for a retired investor will be kept in safer investment avenues, so there is no risk in the goal not getting met. In addition to this, every investor should follow an asset allocation model. As is the case with financial markets, different asset classes move in different directions at any given point of time. So it is best for an investor to balance his portfolio carefully so that he is safe-guarded against the volatilities in the stock markets. By dividing your assets amongst different asset classes be it debt, equity or gold, your portfolio is shielded when any one of them moves up or down.

What Your Options?:

Clearly, the ride ahead could be choppy. Volatility could be the order of the day. Unless things go bad globally, one should not see more than a 5-7% downside from these levels. However, clearly, it is also not the time to jump in and buy. Advisors suggest a staggered approach, going ahead. "For fresh equity investments, we suggest deployment on staggered basis over the next three to six months. Markets are trading at attractive valuations of 15 times FY12 earnings which is lower end of the historical trading range of 14x-18x on a forward basis. So, then where should money go to? Should one buy into large-cap equity funds or mid-cap equity funds? There is no simple answer here. However, in uncertain times like these, it makes more sense to stick to large caps. Small caps could be hit harder due to poor liquidity, and fall more than fundamentals justify. Large-cap funds should constitute around 70% of your portfolio.

   Financial planners suggest taking a look at the risk appetite before zeroing in on allocation. Based on risk profile, time horizon (mid cap will need longer time than large cap to smoothen out volatility), past experience in investing and behaviour of the client (does he react "violently" to short-term sharp movements) the allocation between large cap and mid cap may be determined. However, there are some who prefer taking a contrarian view as well, as it will earn you that extra buck. "The banking sector after the recent correction looks good as reforms are expected and it has no international exposure. He recommends exposure to the banking sector through the Reliance Banking fund. He also recommends Franklin India Pharma Fund as pharma is a defensive bet and remains unaffected by high inflation or a downturn in the economy. Sector funds have their own risks and require monitoring of variables that influence the future of the sector. If you do not have the time to track these funds and sectors or lack the necessary skills, better avoid the sector funds. Remain invested in diversified equity funds with a long-term track record and let the fund manager decide. So, arm yourself with the right mutual funds going ahead.

MUTUAL UNDERSTANDING

Ø       INVEST IN equity mutual funds only for the long term. If your time frame is less than a year, you would be better off investing in non-equity products

Ø       MARKETS GO through ups and downs. Hence, it is always wise to stick to your asset allocation

Ø       REVIEW YOUR mutual fund investments periodically and make necessary changes if any

Ø       HIGH-RISK takers could invest a small portion of their wealth in sectoral funds

Ø       MARKETS MAY not always move on fundamental basis. Factors like liquidity flows also affect markets in the short term

Ø       DO NOT have too many mutual funds in your portfolio. Ideally, your portfolio should not have more than 6-8 mutual funds