In an interview to CNBC-TV18 personal finance expert, Hemant Rustagi of Wiseinvest Advisors shared insights on how one should invest in the market.
Below is the verbatim transcript of an interview aired on CNBC-TV18.
Q: What precaution should an investor take when investing in a rising market to avoid the scenario when the market have rallied all the way and then you start buying in at the highs?
A: A rising market general evokes mixed reactions from investors. On one hand there are investors who invest in the market without a clear time horizon, without a clear goal. These are investors typically who invest when the market starts rising, in fact many of them enter into the market at the fag end of the rally. So, when the market starts correcting they stop investing fresh money and hold on to the existing investment in the hope that in future when the market goes up they can recover their losses. On the other hand there are investors who regret not exiting from the market at much higher level so they wait for the markets to go up again. They are quite determined that they are not going to miss out the opportunity next time.
So, when the market starts rising these investors start exiting from the market at different phase of the rally. Therefore, some of them either cut down their losses and some recover their losses and some exit after making some profits. However, depending on what stage of the rally if the rally continues they lose out on the market. Case in point here is the last six-seven months. If one notices, every single month the equity funds have been facing net redemption. Hence, the fact is during this seven month period the markets have risen by almost 22 percent. Then there are investors who do not invest when the market is going down expecting the market to go down further. So when there is a u-turn in the market suddenly they have this left out feeling and they become quite aggressive investors and repeat the same mistake of investing either without a clear goal or without clear time horizon in mind.
Therefore, it is always important for investors to remember that the right way to invest in all asset classes including equity is to follow your asset allocation model and continue the process irrespective of the market conditions. Even for a long-term investor it is very important for him to reduce the exposure to equity when there is a significant tilt in favour of equity due to rising market. However, there has to be a strategy, it should not be done in a haphazard manner. One such strategy is rebalancing the portfolio. Now rebalancing is a method that allows investors to bring their portfolio back to the original allocation. Now what it does is that in a rising market it allows an investor to exit from equity and go into debt but there have to be certain points that investor have to remember. One, it should not be done every now and then, it should be done hugely once in a year and it should be done only when there is a significant move around 10 percent or so only then the rebalancing should be done. Another important point for every equity investor is they need to realise that volatility is an integral part of equity investing. So, every one who invests in equity has to contend with that.
Thankfully there are strategies like invest for long-term and invest systematically. One can not only face volatility but also turn it into advantage. For example if one sees the last five years, which has caused a lot of heartburn for investors, the market is down by 2 percent from January 2008 to January 2013. Therefore, those investors who invested through systematic investment plan (SIP) have made significant return, in fact some of the examples we can see here are HDFC Equity, which has given 15 percent return, Canara Robeco Equity fund has given 15 percent return. There are in fact a number of funds that have given a return of ranging between 10-20 percent. So, it is important for investor not to get carried away when they see market rising, not to behave irrationally. The important point to remember is, do not look at it as a great opportunity to make quick buck, and also do not look at it as a missed opportunity.
Q: What is the exact time horizon that an investor in equity funds should look at? There would be a lot of equity investors who entered in January 2008 and will still be licking their wounds depending on the fund of their choice. Is five years a good enough long-term? How long is the long-term?
A: The important point here to remember for every equity investor is that equity is not a one-time activity. It has to be a process. One needs to invest in it continuously. In most of the cases, where investors have invested in 2008 when the market were still higher from the current levels is that they have not actually followed it up with a subsequent investment. So, it is very difficult to say whether it is three years or five years. The point is if one follows a goal-based investing, for example, somebody is investing for a child education or retirement for 15 years then he has a clear time horizon and he can continue investing. The thing one need to do is maybe couple of years before completing the time horizon, start exiting from equities so that he can protect all the gains. However, the fact is that equity investing is not one-time activity. It has to be a process. So, if one believes in equity, begin investing in equity, one need to follow it up over a period of time.
Q: What is gold Exchange-Traded Fund (ETF)? Which is the best ETF from where I can get good returns?
A: I would say that there is definitely case for keeping gold as a part of the portfolio because it has a negative correlation with other asset classes and also it does not carry any credit risk. Of course, there is risk of volatility that investors have to face, but that can be tackled by investing systematically. Gold ETF definitely is one of the best ways of buying gold, especially when one is investing in gold for investment purpose.
Mutual funds offer two varieties here, one is gold ETF and the second one is gold savings funds, which are typically fund of funds. The gold ETF is suitable for those investors who either have a demat account or do not mind opening a demat account. So, if he is willing to open a demat account or he already has one he should look at gold ETF because it is very-very simple to invest and is like buying any other shares.
They are more tax efficient than physical gold. The performance of most of the gold ETFs is very similar because they all track the gold price, so there will be hardly a difference of 0.5 percent or maximum 1 percent. Some of the gold ETFs that he can consider are Goldman Sachs Gold ETF, SBI Gold ETF, HDFC Gold ETF; these are some of the gold ETFs, which he can consider for investment purpose.