Why Should You Invest In Current Market

Why Should You Invest In Current Market : Why

Dear Investor,

Why should I invest again in equity, when I have got just 8% annualized returns, over the last five years?”, asked my client, irritated. I told him that I’m not suggesting that he invest in equity now and that I’m actually suggesting that we should relook at the portfolio and do a bit of rebalancing. I told him that we will actually be moving away from equities.

 

Assuaged, he was willing to listen. I now told him that I have not lost faith in equities; in fact, it is quite the opposite. But then, I told him, I was willing to make a tactical call. Equities keep going up and down. It may be due to the FM talking up the markets with possibilities of reform or based on the growth story of Narendra Modi but that is not something one needs to worry about.

 

We need to worry when the economy goes into a tailspin due to a combination of factors that would not get addressed in the near future. Interest rate being high is only part of the problem. An adverse investment environment is hampering new investments coming in. Difficulties in getting environmental clearances, changing regulatory environment, uncertainty in policy framework, retrospective taxation evoked by income tax department and general bureaucratic problems abound, have started weighing on the economy. Industrialists are vocal about going abroad for investments. There have also been the usual, known problems of skills shortage, power woes across the country, coal & iron ore shortages and other such problems. The previous Government had launched a lot of populist programs which completely played havoc to the finances of the government. In a election year, it could have gotten worse. But now with anew majority Government in place what can we expect. Current account deficit is high too ( though now manageable ) and we do not have much control over it. Add to this the continuing challenging environment abroad and an impending coal crisis.

 

All these point to the fact that things are not going to improve in a hurry. The FIIs had also started retreating in the recent past after investing continuously in the past year. Though now their confidence is returning. Equities hence may or may not do well this year and hence the need to take a measured tactical call.

 

What are we suggesting ?

 

We are suggesting that those doing long term, 5 years and beyond, SIPs in mutual funds can continue with a long term focus. However, if one is looking at needing money in 2-3 years and want to accumulate through monthly investments, we are suggesting investing through equity growth funds to do that. Short to medium term debt funds with upto may be one year maturities are suggested for those who need access to their funds, in less than a year.

 

We are suggesting a reallocation of debt assets to equity funds as required, in specific cases. This is a tactical call. We are suggesting between 50-60% reallocation based on the specific requirements in client’s portfolios, in view of the conditions explained earlier.

 

Equity portion of Mutual funds are expected to have a good run in the months ahead. It is offering good returns now and is expected to give decent returns going forward as well. It is also expected to benefit from a falling interest rate scenario that is expected to be there, for the next two years atleast. The weapon of choice would be growth funds or actively managed sector funds, which allows the fund manager to take the duration calls as well as managing the composition of the portfolio. For the normal investor, this seems like a good bet. The other investment which smells of roses is the Index Funds (ETF's) as the return potential is more visible here.

 

Index ETF's get better tax treatment. They can take advantage of indexation benefit and are subjected to capital gain treatment, which essentially ensures that one may pay an effective less tax overall. This is another reason why Index ETF's recommended. They would offer better post-tax returns in the current scenario than the traditional Bank FDs, Company FDs and Small savings instruments.
For Short Term. The dividend distribution tax hike in the budget from 12.5% to 25% has brought down the returns one can expect from Ultra short term funds. Hence, it’s attractiveness for liquidity purposes has diminished. Still, it is offering rates higher than bank FDs of short tenures and can still be used for parking short-term money. Since the returns they offer today are comparable to somewhat higher tenure debt funds, smart investors would want to invest in Ultra Short term funds and start withdrawing them for liquidity purposes, after a year only.

 

Contingency funds are also better kept in medium term funds, as they may not be required for long periods. Liquidity funds are best kept in a mix of ultra-short term and Short-term funds, to ensure that money can be accessed based on requirements, without exit loads.

 

What is suggested here is what one could do in this financial year. Ofcourse each person’s financial situation is unique and they should look at what they should do with their portfolio. But a tactical allocation into debt investment options seems to be a good idea in the next one year atleast.

Happy Investing.