Crossing the Hurdles

Publication: Business Standard, Mumbai;   Date: April 5, 2009,  
With All asset classes under stress, you need to have a sound strategy to survive these tough times.

As one enters the new financial year, one is faced with a large number of questions. After the stock market debacle in the last year, all investors would be wondering if equities are still a safe haven. In fact, investors even in the real estate or fixed maturity plans (FMPs) of mutual funds would be doubly cautious this year.

And what is not helping them is the rising uncertainty in the last four weeks in stock markets. The markets managed to surprise everyone and even made astrologers look more credible than economists and market experts. The Sensex closed in the positive for four weeks in a row at 10,348.83. However, given that the corporate results season is going to start soon and it will be followed by general elections, no one can actually take a call on where the markets are likely to be in the next two months.

No wonder, though foreign institutional investors have been on a buying spree in the recent times, mutual funds continue to sit on cash. Even high networth individuals are unwilling to commit too much. Obviously, for the equity investor, things do not look too rosy.

At the same time, buying has not really taken off in the real estate sector. Most feel that more correction is important for buying to come in. Even banks who were quite willing to extend home loans and personal loans have become more cautious. In fact, while home loan rates have been cut, banks are unwilling to extend loans of more than 70-75 per cent of the house value.

Gold, which is another favourite asset class for Indians, touched a high of Rs 15,700-plus and is back to around Rs 14,700. The sharp rise has led to relatively less takers for the yellow metal. India, the world’s largest importer of gold, could have turned exporter in the last two months.

Finally, on the debt side, bond yields have corrected and caused prices to come down or remain volatile.

In other words, there is a high level of uncertainty in all the different asset classes. And from an investor’s point of view, there seems to be no asset class that would ensure steady returns and be safe as well. Of course, fixed deposits are an option, but returns from them could suffer a hit from income tax.

In such circumstances, it is important to carefully analyse the situation and then, take tiny steps to make the right investment.

The first step that one must take is to understand one’s financial goal. The next is to figure out where you are placed, in terms of achieving that goal. And then comes the most important step of allocating funds towards these goals. The actions will vary from person-to-person but here are some broad guidelines, based on the outlook of these asset classes.

Equities: Though the equities market has been showing a fresh rally, remember that you cannot time the market. The best strategy is to invest in a staggered manner, each time the market corrects. That is, out of the investible surplus, invest 5-10 per cent in good blue chip stocks every time the market falls. This will ensure that you build a good portfolio at cheap prices.

Yes, there will be days when it will seem that there is no hope for the markets. But there is no point panicking because it will only result in unwise decisions. And if you are a direct equity investor, gauge your tolerance to risk. Because, on a bad day, even the best of blue chips can be hammered down. Though it is easier said than done, it is best to sit tight sometimes.

Also, if you are using the mutual fund route, then continue your systematic investment plans (SIPs) or start fresh ones. When using the SIP route, remember that there is no point waiting for a correction.

Most importantly, this is the time to weed out stocks with poor fundamentals, even at a small loss. Reinvest the money in good companies with low valuations. Also, look at moving money from non-performing funds to large-cap oriented funds.

Gold: In an era of a weak dollar, gold will shine and could go much higher from current levels. However, if you have bought gold a long time back, Rs 14,800- Rs 15,700 would be a good target price to partially book profits, or get back into cash.

Though gold has the potential to reach Rs 17,500 levels, the potential upside can only be sizeable if gold is bought at much lower levels. A good price to enter gold can be around Rs 11,000-Rs 12,000. Investors in gold, though, should be aware of the fact that the yellow metal can be a very volatile asset class. It can move up or down by over 10 per cent in a single day. Over the next two-three years, gold could shine but book profits regularly.

Real Estate: Every newspaper today has advertisements from several builders giving lucrative discounts for a few days. But the reality is that there are still very few transactions happening, barring a few instances. Banks are also offering innovative interest rate schemes, though they have not reduced interest rates sharply. Interest rates could go down further in the next several months and being patient will be a great idea.

Even property prices could fall further in the buying season between October and December. Home buying could become more attractive during that period. For an investor, this is a strict no-no period. With high uncertainty in this sector, its best to wait for sometime before you take a call.

Debt: Keep short-term money in fixed deposits, especially for ones in the lower tax bracket. If you are in the higher tax bracket, you can look at floating rate and short-term income funds. If you have a time horizon of 8-12 months you could take exposure to long-term bond funds. Though bond markets have been extremely volatile because of the government borrowing programme, a part of your portfolio could be there for decent short-term returns.

Yes, things are looking really bad and uncertain. But you need to be a brave heart now. Too often, we hear stories of investors who entered a rising market and have suffered. It’s always best to enter when things are uncertain and benefit when the market goes up.

The writer Amar Pandit is a certified financial planner

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