Expert advice

Aug 26, 2013,18.33 IST

Here's how to deal with the current economic scenario

Suresh Sadagopan
Ladder7 Financial Advisories

The economy continues to look down cast with various indicators coming out looking decidedly bearish. The IIP numbers, Purchasing Managers Index, Inflation, GDP number etc., leave much to be desired.

In the sea of misery, there is one redeeming ark – the trade deficit has narrowed sharply, which is possibly the only good news. Another one – the monsoon has been good and is expected to boost the rural incomes.

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Stock markets have been buffeted by the falling rupee & the exit of money by FIIs. Equity markets have been affected & how! Among this, the mid and small cap stocks have seen massive erosions, some of them as high as 95%!!!

Consequently, mutual funds have also had their rough patch. They have fallen less due to diversification & fund manager actions, that inherently is one of the strong suits of MF schemes.

The sour point now is that even the debt markets have turned turbulent due to RBI actions, which have effectively increased the borrowing costs for the banks.  All this has put a question mark on what we need to do now. That is exactly what I’m writing for.

What do you do now?

1. Equity

One of the frequently asked questions is whether the Equity SIP should be stopped.  The short answer is – No.

Equity SIPs are done with a longer investment horizon for meeting future goals. Also, the best way to invest in equity assets is through small monthly investments which does away with the need to time the markets & ensures cost averaging ( apart from various other pluses ). Hence, stopping the existing equity SIPs is not a sound idea.

As far as the existing equity investments are concerned it is better to stay put rather than change anything at this point. When the markets are in a tizzy, it pays to go by the dictum which stood our past PM ( Narasimha Rao, who was the first one to anoint it with ceremonial honours !) in good stead – No action is also action.

In due course, the markets will calm down, when the effect of the corrective action being taken, bears fruit.

2. Debt 

After the shock treatment meted out by RBI, investors are skeptical about the debt markets too. But look at the other fact – RBI cannot keep the interest rates this high and will have to reverse it sooner than later, if it does not want to as the chief architect of a crippled economy.

Hence, the direction will reverse and the interest rates will come down. The current losses in the debt funds are due to the Mark to Market losses. That will turn to mark to market capital appreciation when the direction turns.

That should be sooner than later. So, the fall in NAV seen now is purely temporary and will reverse and start giving profits in time. Hence, if as an investor, you stay invested, you may actually reap rich rewards in future.

Since, the medium & longterm debt funds, including Gilt funds have fallen now, the intrepid investor has a chance to get in now and ride the interest rate south side movement. This ofcourse has some risks as no one can predict exactly how the markets are going to unfold in future. RBI itself was not expecting the sharp yield spike in Gilts.

3. Does one move from Equity to FD/ property/ Gold? 

That seems like a logical thing to do. But the wrong thing to do!  Just because equity is doing badly now ( and has been doing so for the past five years ), you cannot write it off. You could, if you are going to write off India itself. Equity has performed in the past and it will in future too.

Moving from Equity to another asset class now will ensure that your loss or poor returns becomes real ( instead of notional ). Now if you invest in FDs, it could give stable returns, but it’s post tax returns cannot beat inflation. Moving it will look really silly once equity starts to move up. Equity movement can be meteoric after periods of languid meandering. Patience pays.

Property investments should be done on merits. Prices have gone up in the real estate markets quite sharply, for 7-8 years now. The upside can be modest. The probability of a downside or low returns on investments is a distinct possibility. Invest if you are convinced that you are getting a bargain.

Gold is dicey. The gold prices have gone up due to rupee depreciation & the import duties. In dollar terms it has actually gone down. If one were to look at the past year, Gold has moved from around $1,650 ( Sept 12 ) to an ounce to $1,370 now.

4. That brings us to the concept of asset allocation.

Investors need to decide what their goals are and to achieve their goals, what kind of asset mix is required. This has to be carefully chosen after due consideration for risk, return, tenure, liquidity, taxation etc. Stay invested based on that asset allocation. Every asset will not give good returns, at every point. But every asset has a role to play in the portfolio.

We cannot expect to flit like a butterfly  from one asset to another and expect good portfolio returns. In fact retail investors are more known for entering at the end of a bull phase ( like say property ) and exiting in the middle of the bear phase ( like say equity ). Some tactical allocations can be done to take advantage of the prevailing situation; but this can be on just 5-15% of the portfolio.

5. Opportunities 

Fixed Maturity Plans ( FMP ) has the potential to offer between 9 -10% post tax returns, based on the yields of the underlying instruments for tenures between one to three years. For those who do not want interest rate risk, this is an excellent instrument. Those with a higher risk appetite should wait it out in debt funds.

Lots of equity funds have been beaten down.  The best way forward is to keep the SIPs on. The more daring approach is to invest in equity assets now. That ofcourse is not for everyone and is to be attempted only by those having a high risk appetite.

6. Caution

Do not assume any liabilities at this point when the economy is in doldrums.  Keep the expenses down. Postpone any capital purchases. Don’t try anything fancy. Don’t keep seeing the prices of your investments daily. It can give you ulcers & hypertension. Just stick to your routines.

When you are in quick sand you go down faster if you move vigourosly. Bring forth your survival instincts. Things are currently bad. But in every situation, the results are based on how you react & take advantage of the situation. That alone separates the men from the boys. Go ahead, earn your stripes!

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