Even as experts predict more corrections, here are some ways to safeguard your investment.
The equity market is in correction mode. The BSE Sensex, which touched an all-time high of 30,025 on 4 March, the day the Reserve Bank of India (RBI) cut the benchmark rates, is down by more than 6%. Experts say there is more volatility in store. We have seen some correction, but nothing meaningful or really big. The fund house is waiting for further correction and the cash levels at Quantum Long-Term Equity Fund is more than 30% right now.
Fear of an impending rate hike by the US Federal Reserve is the main reason behind this uneasiness in the market, which has forced fund houses to sit on cash. In addition to the commodity market and emerging market currencies, the stock market too has been impacted by fears of a rate hike.
The recent unseasonal rains that have ruined crops have led to fears of an uptick in inflation, effectively watering down expectations of accelerated rate cuts from the RBI. This explains why yield on the 10-year government bond is still quoting at around 7.7%, despite the 50 basis point rate cut by the RBI. Also, even though the market is close to its all time highs, corporate earnings are not catching up, putting the market under pressure. Aggregate earnings of India Inc came down 30% in the third quarter and with commodity prices remaining weak, fall in earnings is expected to continue in the fourth quarter as well. The expected revival in demand following the formation of a `business-friendly government' has also not happened.
In such a volatile climate, what should investors do? Booking profits and sitting on cash till a meaningful correction takes place is one option. Though this strategy will reduce the downside risk, it could also prove counter-productive, as you may not be able to time the market. Going with a normal equity or a balanced fund won't serve the purpose either as few of them are willing to take active cash calls in the current climate. Mutual fund schemes taking cash calls have their own limitations. Several schemes that took cash calls before the 2009 elections missed the stock market rally just after the results
If fund managers want to reduce their effective equity exposure while re-instating, in a short time period, their old equity levels, they have to use the futures and options (F&O) market. This means only fund managers with an active derivative market strategy will be able to protect their investors' portfolio in the event of a sudden correction in the market. A new breed of schemes, which uses the F&O strategy actively to hedge part of their funds, is on the rise. But the returns from these funds due to their lower equity holdings will be slightly lower than those from balanced funds. What they are trying to achieve is returns with low volatility
ICICI Pru Balanced Advantage Fund is a good example of schemes using the F&O strategy. Its effective equity allocation varies between 30% and 80% depending on market valuations--based on Nifty PE.
The equity-debt proportion is rebalanced on a daily basis, using an in-house model. When the model indicates equity levels below 65%, we rebalance using Nifty futures or stock futures. The net equity exposure as on 28 February is 38.64%.
Edelweiss Absolute Return Fund uses several strategies to maximise returns by taking large equity exposure and, at the same time, tries to reduce risks by investing in special situations, arbitrage opportunities and also taking dynamic hedging depending on the market. For example, it limited the 2011 calendar year loss to 2% when the balanced fund category average lost 18%.
The L&T Equity Savings Fund also belongs to this category, but investors need to wait for a big correction in the market to assess whether the systems followed by this fund are working properly. Similarly, you can ignore most of the new series funds that got into this space till their is a correction that proves their value.
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
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