Investing Strategies for the year ahead

The upheaval in the global economies and the resultant massive downturn in the stock markets through 2008 and early part of 2009 saw a section of equity investors exiting from the market in a panic. Besides, there are investors who have been waiting on the sidelines to invest at lower levels. Both are at a crossroads today. While the panic sellers are still ruing their rash decision, the fear for the fence sitters is a result of unpleasant experiences of the past.  So, what should investors do in such a scenario?

In the present market conditions, the crucial part is to adopt the right approach and select the right investment options rather than following a strategy whereby one takes aggressive decisions in order to make up for the lost time and opportunities. The major issue, therefore, is to manage expectations and not allow one's asset allocation to drift for short term gains.  As we all know, each investment carries some risk and that it is vital to choose wisely.  While there are plenty of options available to design the portfolio, the key is to invest in a manner that allows you to potentially lower your investment risk and still maintain the chances of achieving your varied financial goals.

This is what you need to do to achieve investment success:

It's time to adopt an asset allocation model

Asset allocation i.e. the process of spreading your savings across different types of investment can help you find and maintain your balancing point and that goes a long way in pursuing your goals at a risk level you are comfortable with. For an asset allocation strategy to be successful, it must be flexible enough to accommodate the changes in one's financial circumstances as well as the changes in the economic cycle. It is important because economic environment has a direct impact on the behaviour of the financial markets.
Circa 2010 is likely to pose challenges even for experienced investors. That's why, determining and maintaining the right level of risk tolerance should be an important aspect of your investment strategy. Don't make a mistake of underestimating risk and/or overestimating reward from an investment. In fact, estimating the risk associated with an investment option is more crucial than estimating the returns. By understanding investment risks and how they relate to potential returns, you can improve your chances of building greater wealth. Remember, mutual funds offer the best possible options to practice asset allocation and also provide you the flexibility required to make it a success.

Strategy for equity portion of the portfolio

The stock market is likely to do well in 2010, albeit with increased level of volatility.  However, considering that equity as an asset class performed exceedingly well from 2009 lows, it would be advisable to exercise a little caution during 2010. The out-performance of mid and small stocks over the last six months or so may be tempting enough to go all out for them but the key would be to resist the temptation and focus more on your own risk profile and the existing portfolio mix.  While for those who intend to invest directly in stocks, the success would depend on the right stock selection, for mutual funds investors the correct strategy would be to go for funds that have a well defined strategy and investment universe so as to retain control over the exposure to different market caps in the portfolio.

For those investors who have been investing through Systematic Investment Plan (SIP), the key would be to carry on that process and try to increase the investment amount in keeping with the increased income levels. Those who had discontinued the process during the market downturn need to restart the process all over again. If 2010 turns out to be a volatile year for the stock market as expected, the section of investors that would benefit the most would the one that follows a disciplined approach.

Strategy for investing in debt or debt related instruments

For this part of the portfolio, you need to have a personal yardstick which you may aim to better with your investment in a debt or debt oriented fund. This may, for example, be the returns that you have been getting from some of the traditional investment options like deposits, bonds and small savings schemes. To achieve this in the year 2010, the key would be to manage credit and duration risk.

Going ahead, inflation as well as the subsequent movement in the interest rates are going to be the most influential factors for this part of the portfolio both in terms of selection of instruments as well as their performances.  While, one may debate about how quickly interest rates will start moving up, there is no doubt that interest rates will increase from here.
Hence, you may be better off either focusing on short term bonds funds for another couple of quarters or invest in floating rate funds. Thereafter, debt funds and FMPs will have a role to play in investing long term funds. For those who do not mind some exposure to equity in order to get better returns than pure debt and debt oriented funds, MIPs will continue to be a good option for at least 1-2 years time horizon.

Strategy for investing in Gold

Notwithstanding the recent volatility in the gold prices, it continues to remain one of the attractive options. Considering that it would take some more time for the global economies to recover fully from the setbacks of 2008, an alternative asset like gold will remain an attractive investment option. However, as the gold prices are likely to be volatile going forward, one would be better off buying periodically rather than investing a lump sum. Remember, ultimate role that gold plays in a portfolio is that of hedging against the inflation. Therefore, restrict your exposure to gold to around 10 to15% of the portfolio.

Though Indians have always fancied owning gold for various cultural and emotional reasons, it has not been actively considered while working out the asset allocation. It's time to do so. Today mutual funds offer investors a couple of choices that can eliminate many risks that one has to face while holding physical gold.

Firstly, there are Gold Exchange Traded funds (GETFs). An exchange traded fund with gold as its underlying asset is called Gold ETF. There are many advantages of investing in GETFs. For example, gold storage and other costs are shared with other investors. GETFs allow investment in gold in small denominations thereby allowing retail investors to participate. In the secondary market, the minimum lot is one unit.

Another option is to invest through fund of funds launched by domestic mutual funds to invest in gold mining companies through an international fund.  Investing in a scheme like this provides investors access to fund manager's expertise and active fund management, which is not available in GETFs. Also investing in gold mining companies offer investors the upside opportunity through organic/M&A growth as well as leverage the increasing price of gold. In other words, investors benefit as the profitability of gold mining companies increases with a rise in gold prices.
Ideally, a combination of both i.e. GETF and Gold equity fund would be the right way to invest.

Check out - Performance of Gold Funds

Find a professional advisor for yourself

If you are a mutual fund investor and have a professional advisor to help you, be assured that half the battle is won. However, if you are dealing with someone who is taking an easy way out to convince you to invest, you need to be very careful. As mutual funds in India are evolving, so are different strategies to get the best from them. Making an investment decision for investing in mutual funds (MFs) is tougher than ever today. While the variety of funds offered by MFs is great from investors' point of view, selecting the right ones for meeting different investment objectives can be quite a challenging task.

Last but not the least, to be a successful investor it is crucial to follow basic investing principles. The year 2010 is not going to be any different. So, go ahead and plan your investment for the year ahead and carry on the process of wealth creation. Meanwhile, don't forget to keep an eye on the developments regarding the proposed direct taxes code likely to be operational from April 2011. As a clear picture is likely to emerge during 2010, be prepared to amend a part of your long term portfolio, if required. However, a word of caution would be appropriate here; don't act in haste.

-Hemant Rustagi..

The author is CEO, Wiseinvest Advisors Pvt. Ltd. He can be reached at hrustagi@yahoo.com

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