Till recently, investors always had a fancy for a particular asset and never explored options offered by other products. A real estate investor, for instance, never looked beyond property for his longterm needs as he was sure of its performance. Similarly, risk-averse investors banked on fixed deposits for both their short and long-term needs. The objective in most cases was accumulation as returns were secondary.
In recent years, the trend has undergone tremendous change thanks to the emergence of new options. More importantly, the current investor has the ability to take risk as he is not completely dependent on his savings for short and medium-term needs. The high disposable incomes and a steady rise in the ability to earn more have done the trick. As a result, investors too have begun to look at a combination of products to maximise returns. Smart investors aren't depending on one product to make their money grow any more.
Interestingly, this has also resulted in churn from one asset to another and there is an increased coordination between two or more assets. A classic example is the simultaneous use of debt and equity. Today, even a die-hard equity investor has begun to allocate a portion of his funds to debt due to a number of reasons. While the primary objective is risk management through asset allocation, another factor is to take advantage of the opportunity offered by equity at regular intervals. From recent market volatility, the investor has begun to realise that he needs to have enough liquidity to take advantage of market downtrends.
In this background, stock market investors can use a combination of products to be liquid to buy into dips. For direct stock investors the introduction of mutual fund investments through the trading platform is a boon. Till recently, mutual fund products were not integrated with the stock portfolio and hence any redemption amount had to be ploughed back to the trading account. Now that they can be traded on NSE platform, investors can use cash equivalent products like liquid funds and short-term funds to park their cash and use them according to market conditions.
The challenge for many is fixing the amount to be maintained in liquid form. While the corpus depends on the individual needs and financial stability, from a trading perspective, it is not a bad idea to hold as much as 10 percent in pure debt form. Now that the interest rates too are on the rise, even short-term debt products manage to give some good returns. For instance, the annualised yield on a liquid plus plan is inching towards the five percent level and for shortterm funds it has been in the range of 7-8 percent. However, one should avoid fixed maturity plans as they are not flexible like open-ended debt funds.
Many investors are comfortable with fixed deposits for their debt allocation and it is not such a bad idea to be in this product in the current environment. The deposit rates on short-term products have gone up to 6-6.5 percent and the rise in rates has been more pronounced in this category than in long-term ones. Again, don't take a very long term view if deposits are chosen for liquidity management. One should be clear about long and short term needs of funds as the choice of product purely depends on this crucial factor.
Another product that allows good management of market volatility is dynamic PE products. As the name indicates, they manage allocation towards equity through a strict tab on PE multiples and hence, lower the PE, higher would be the allocation towards equity. This product, at present, is being used sparingly by the investor community but that is likely to change as they are forced to deal with increased volatility in the markets.
