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Make a Choice - Good product or good advice?

What does the retail investor do in choppy markets being seen now?
YES, the current markets are in a bearish phase on account of several global and domestic factors. High crude prices are, however, the single biggest factor for the meltdown. It is hard to predict when the markets will stabilise. Investors who invested in equity markets at the peak time are anxious to know how they can protect their investments. Also, there are several investors who are interested in entering the markets and are keen to understand what should be their strategy.

Firstly, let us understand that the current behaviour of the stock markets is not unprecedented. If you go back in history, both domestically and globally, the stock markets have moved in various directions over a short period of time. So do not panic.

Let us assume that there are two investors: investor A and investor B. Investor A invested in equity mutual funds at the peak of the markets in January 2008 and has now witnessed erosion of his capital. Investor B, however, was more risk averse and preferred to keep his money mostly in fixed deposits.

What should investor A and investor B do in this choppy market? If investor A has balanced his investments across different asset classes such as equity or equity funds, fixed deposits or equivalent and liquid cash or liquid funds, in my opinion, he has less to worry. Asset allocation as a disciplined activity must always precede investments.

I would advise him to invest in the liquid fund of a few select mutual funds. And then instruct the fund house to switch a fixed amount into the equity fund through a ‘systematic transfer plan’ (STP) over a minimum of three-year period. This could be done monthly, weekly or even daily. Why liquid fund? Given the high interest regime prevalent now in the light of high inflation rates, investing in a liquid fund would provide market-related returns, which is better than keeping money in a savings account.

Why STP? By instructing the fund house to switch a fixed amount of fund to the equity scheme at regular intervals, it is possible to reap the benefits of being present in the fixed income market and entering equity at a relatively attractive valuation.

The fall in equity markets by over 35% provides a good opportunity to enter the markets through a regular, disciplined manner over a period of time. This allows taking advantage of the market upside over a medium term perspective. The fall in value of equity investments since January 2008 can be raised to the desired level of asset allocation through this strategy. Mutual funds are very convenient and efficient vehicles to execute this type of investment strategy.

If investor A is over-invested in equity mutual funds but does not need immediate liquidity, I would advise him to stay invested. He should not keep moving in and out of markets. This would further erode his wealth, apart from higher incidence of taxes and increasing his transaction costs through entry and exit loads.

As and when he receives additional cash through salary or other sources, he should remain invested in liquid, safe instruments and not increase his equity exposure for the time being. He should not be tempted to invest in equity as he is already over exposed.

Another fund that one might like to consider is the fixed maturity plan (FMP). A 12-month FMP can potentially offer higher post tax returns than fixed deposits in the current interest rate regime. Again, the diversified portfolio of the mutual funds, low expense ratio coupled with tax benefits offer a very attractive way to enhance the overall return on investments.

Investor B should consult his financial advisor who can assist him in allocating his investible surplus in an efficient manner. He must ask questions and be satisfied about the process. If there is a choice between ‘good products’ and ‘good advice’, choose the latter.

Several newspapers have advised readers about the benefits of investing through SIP. I would reiterate the importance of investing regularly either through SIP or STP. Given the attractiveness of the short-term interest rates, one might like to consider switching one’s investments in fixed deposits into liquid funds and then open a STP account, as explained earlier. In the case of investor A, I would advise putting around 30% of his total investments into liquid fund and transfer this money through a daily/ weekly STP account into an equity fund. In the present market, my advice would be to choose a diversified multi-cap equity fund that has higher weight age on large cap, well established blue chip companies.

Mutual funds are affordable, allow diversification and are convenient to invest regularly. Like in every decision in life, seek the right kind of advice and choose a trusted brand.

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