Brijesh Dalmia

The Indian stock market kicked off 2008 by rendering an unexpectedly tough stress test on the portfolios of many investors. The Sensex fell 7.18% in the last 10 trading days of January alone, amid concerns about a slowing US economy. Sudden corrections such as this one can test the mental fortitude of some investors as well, shaking and stirring their faith in well-crafted investment plans.

Loss aversion, an affliction that often strikes during market turmoil, can cause rational people to make costly investment decisions. The result— investors who were queuing to buy the best equity funds till December 2007 are now looking for safer havens. While the cash flow and risk-taking ability has not changed, the willingness to take risk has reduced and there is a definite shift of preference from equity-oriented schemes to debt schemes. Investors who were investing in aggressive growth funds are now looking at balanced funds and those who preferred balanced funds are now considering fixed maturity plans and floaters.

Some of my clients, who were not happy with a long-term projected return rate of 12% a year in equity funds (they considered it conservative), are now apprehensive about achieving their financial goals which are still 15 years away. They are asking whether they should switch their investments in equity funds to MIPs or floater funds.

 

While the name and historical performance of funds mattered a few months ago, investors are now flipping the pages of fund fact sheets and looking at the top holdings. Funds having a track record of giving 40% CAGR over past five years are being questioned because they have higher exposure in banking stocks or for that matter oil companies. Monetary policy, CRR, international markets, crude prices, etc, which did not figure in any discussion, are now the top agenda.

Investors are holding back their decision of making investments. Even the not-so-savvy investor is looking at the daily movement of the markets, watching financial news, reading the pink papers as if he knows the right time to invest. They are talking a different language and are convinced that this is not the right time to invest.

Renewals of SIPs which were due in the last quarter were also hit. Investors who were willingly contributing to SIPs when NAVs were rising are now not willing to see the same benefits when the NAVs are down. The beauty of SIP is that it works over the long term across market cycles; to stick to SIPs over one cycle and not the other takes away the very spirit of disciplined, longterm investment.

Through all this, I have also noticed some positives. I can differentiate the behaviour of investors who have been in the business for long tenures from those who have entered the markets in recent times. People who have been investing regularly with discipline and taking the financial planning route are still comfortable and are not asking many questions. It is the new breed of investors who is facing this crisis. Hopefully, with time, they will become wiser and take volatility in their stride.

Brijesh Dalmia is CFP Director, Mandard Financial, Kolkata.