How to survive in the uncertain times
Everyone is worried about their money and wondering what to do with their money and investments in these uncertain times when there are inflationary pressures, economic gloom and choppy equity markets. Global markets are hostage to political actions (remember Greece) as well as facing its own structural headwinds from deleveraging. Sensex is down on concerns about global growth, rising local debt, fiscal and current account deficits, high inflation ranging 8-9% and slowing GDP. Policy paralysis at the government level is now talk of the town and, more recently, the INR has declined and is now trading at its historical lows. High salaries are becoming hard to justify and Job promotions are held up. And now Fitch Ratings cut its credit outlook for India to negative from stable, nearly two months after rival Standard & Poor’s made a similar call, citing risks that India’s growth outlook could deteriorate.
Concerns are genuine, but we must ensure that we do not panic and survive these times. We need to review our portfolio, revisit our strategies and plan our future course of action.
Lets look at the areas where your money is parked right now and how you can prevent loosing it.
1.. Equity based mutual funds
Investment in Equity and Mutual Funds must always be for the long time. The markets at this juncture could loose another 20% or gain another 20% in 2012-2013. Stick with funds that have high Sharpe ratio. Avoid sector funds. It is advisable to invest in diversified large cap. Mid cap will be more volatile in next one year and might take more beating if the markets fall. Though they are also the one who might get you better returns if the market rise from here, yet might want to wait for some time to get into these.
One common mistake investors do is to invest in mutual funds that were on the top last year. Getting a couple of percentage points more last year is not much of a consolation if the gains of the last three to 5 years get are not up to the mark. Look at the consistent performers, even if they are not on the top always.
Investors who are investing through SIP should continue with it. That allows them to buy more units at lower NAV and thus average out their purchase price. If you do not want to take any risk than invest in an income fund and regularly transfer a fixed smaller amount to an equity fund.
2.. Debt funds
You are loosing money here also. With high inflation the real rate of returns in some cases is even negative. And now fund houses such as SBI, JP Morgan and Principal have either introduced or have increased exit loads ranging between 0.15 – 0.5% on early exits on fixed income funds.
Study the type of debt fund you have. It is likely to be primarily based on the time duration where you have ultra short term funds, short term funds, income funds (for long duration) or the dynamic bond funds, which can go across duration. While investment in equities are advisable for the long time, you must choose investment in debt funds as per the time horizon and underlying objective.
Funds holding a portfolio of bonds with longer maturities see more price fluctuations due to the change in interest rates with the underlying portfolio suffering the most on mark-to-market valuation. This can be seen in the performance of debt funds wherein long-term debt and gilt funds have shown relative underperformance compared with their short-term counterparts.
The rising interest rates augured well for debt investments that offered fixed maturities, considering these are held until maturity and do not bear any mark-to-market risk. That was the reason fixed maturity plans have been in the reckoning of late due to their investment in fixed-income instruments such as certificates of deposit, the rate on which has moved up to almost 10% from 5% last year. Since these funds invest into deposits maturing in line with the investment horizon of the fund, there is no mark-to-market risk involved.
We can expect the benchmark rates to gradually start coming down, thus the market rates will also come down. That will have an impact more on the short term interest rates than the long term rates. So the strategy should be to stay invested, have a short term kind of scheme maturing in the next two to three years rather than a long term scheme of say 6-10 years.
3.. Equity Market
Indian markets have performed badly compared to its peer in Asia and emerging markets. S&P and Fitch have cut down Indian ratings and GDP estimates, inflation is still a concern and IIP data is disappointing, FY11-12 Q4 results were moderate with continuing weak margins. Rupee has depreciated and FIIs have sold heavily. The elections in Greece came in favour of the markets, but the renewed fears over Spain’s increasing borrowing costs due to the rise in the bond yield is again keeping the markets worried
Looking at sectors, banks are under pressure because of falttish rate environment, steady margins, poor asset quality and rising credit costs. IT industry though looking positive in long term is unlikely to spark in 2012. Though unlikely, if the inflation falls at a fast rate and rates are lowered than expected this year, it might have a positive impact on infrastructure, auto and construction sector.
All these will ensure that the markets will remain volatile for some time now. However, there is silver lining here. The current market conditions give ample opportunity to stack up bluechip companies with strong fundamentals and attractive valuations. Do not look at timing the market. Start picking up stocks value at current levels. Sell those stocks which has management issues or where the competition, with in the industry, is performing well but this particular company has continuing difficulty in keeping up with the competition.
4.. Bank FD and other Fixed Income
Due to high inflation real rate of return in some cases was either very poor or was in negative. The steady increase of rates has been halted. We might see some rate cut in the coming months, if not sooner as indicated by the RBI. Thus stay invested if you have invested at the higher rates because you might not get these rates soon.
If you have no exposure to these instruments, start looking for the best rates available and park some funds for longer duration. Avoid callable bonds and NCDs as once interest rates fall, they wont give you the returns that you are enjoying today. Also avoid floating rate bonds where again the interest rates are likely to come down in the coming year.
5.. Unit Linked Insurance policies (ULIP)
Insurance are for a long time. Even though your agent told you about how you can withdraw your money in 3 to 5 years, it is never advisable. Most ULIPs have a load structure where charges are deducted in the first 2-3 years of the policy and it takes a little while before you can see the value of your fund going up. Treat these ULIPs as your friend for life. Keep investing for the entire period with an objective of using this money as Retirement Fund and marriage or education fund for your children. Besides the insurance cover that you are getting. But do not withdraw or surrender your policy, even if the agent ask you to do so repeatedly. If your policy has a feature of systematic transfer plan (STP), then utilize the same.
If you are thinking of buying a fresh ULIP for you or your kid, then look at online term plans. They come real cheap and get you bigger insurance cover at a low price, while invest the amount systematically into other various asset class to build up a target corpus.
6.. Precious Metal
Trading at almost Rs. 30,400 per 10 gm, Gold has broken its previous records in the Indian Market. After hitting Rs. 75,000, silver has been trading in the range of Rs. 53,000 to Rs. 55,000 for quiet some time now. European crisis, choppy market and depreciating rupee has made investors run towards Gold. It is a good asset class, especially when there are uncertainties in the market.
It is advisable that you continue holding on to Gold and Silver. But in case you wish to invest further into it than invest only if you are looking at only one year horizon or if you do not have sufficient investments in the Gold. Silver has always been volatile, but is looking attractive at these levels. Invest in Silver only if you can withstand the volatility and stay invested for a long time. If you are concerned about the purity, ease of buying/selling and safety of holding gold in physical form then you can look at investment in the e-gold from National Spot Exchange (NSEL) or a Gold ETF.
7.. Real Estate
You have been waiting for the loan rates to come down before you invest in the property, whereas property prices at most places are steadily moving upward. If you have been delaying your decision than it was of worth no use.
Invest in property before it reaches out of your current budget. There will never be a right time or the best price. Even at today’s rate you will find that you had invested at a good value. The properties prices are unlikely to come down, unless we see real worse economic situation. Look at smaller or even studio apartments if you have budget constraints. Go for home loan. But see your monthly income and expenses before deciding on your loan amount. It must not put unnecessary burden on you. Loan will save you taxes on principal as well as on interest payment. Look at the builders and projects which have the track record of delivering in promised time.
If you have surplus or can manage for a little while than go for repayment of loan. Even partial repayment of loan shall do. After a little while you will find the RBI softening the rates. Consider migrating to the lender who will offer you loans at lower rate at that time. If you are buying a car, evaluate leasing as an alternate option. Though the decision to lease or buy will always depend on your personal circumstances. If your objective is to get rid of annoying little car payments and you actually want to take ownership, buying a car may be the best option. However, if your goal is to have a new car every few years and also minimize your monthly costs, then leasing a car may be a good option.
Lessons to be learnt
Firstly never panic. And must not take any decision in haste. Study your investments well before signing on the dotted lines. Understand the risks associated with the asset class. There must also be enough flexibility so as to move in and out of the same, in case you have to. Have some buffer, especially if the goals are short term.
Always have a balanced portfolio. Look at your risk appetite. And spread your risk over various class of assets. Even in the same asset class never put your entire eggs in one basket. Revisit your portfolio at regular intervals. Exit those investments that have gone wrong or are not in sync with market or your goals. For example, if you are invested in equities and have a long term goal, stay invested even if the markets are down for some time, subject to the companies you are invested in are fundamentally strong. Rather than selling or waiting for markets to move up, invest when the markets are down.
Encash the opportunities. Explore the cheaper or better options available and migrate from the existing ones. Like if the FD rates are high switch from the older ones. And when rates soften, migrate from the higher loans.