The Indian stock markets continue to reflect various global concerns—the US economy slowing down, geopolitical tensions and the monetary policies of China.
This has led to high volatility in the stock markets, making investors more circumspect about their investments. However, on a more positive note, there are key drivers that continue to fuel India’s growth.
Rising incomes and accelerating consumption have encouraged companies to plan bigger and grow faster. This has also caused the inflow of foreign investment.
With these growth drivers eclipsing the more pessimistic sentiments, there are many who believe that the Indian economy is poised to enter a new phase that will prove beneficial.
However, while I am confident about this growth, there is an aspect that makes even the most seasoned of investors cautious—the unpredictable highs and lows of the stock market. In a scenario where one wishes to optimise risk and returns, mutual funds are a viable instrument that offers a diversified portfolio, ease of investment and professional management. Depending on risk appetites, some investment avenues could be:
For cautious investors: A fixed maturity plan (FMP) is an ideal option for the risk-averse, first-time investor. FMPs invest exclusively in debt and money market instruments, thus safeguarding one’s investment against choppy stock market movements. While the returns generated by these plans are comparable to those offered by fixed deposits (FDs), FMPs have an edge when it comes to tax on returns.
While income from FDs is clubbed with the investor’s income for the year and taxed accordingly, the income from FMPs is treated as capital gains and is eligible for indexation benefits if the holding period is over a year. It is recommended that investors take an FMP of at least one year to get the advantage of lower tax.
For long-term investors with a limited market insight: Investors with a long-term perspective on investing can explore another worthwhile avenue—the systematic investment vehicle.
Systematic investment plans (SIPs) and systematic transfer plans (STPs), which operate on the principle of “rupee cost averaging”, have become an integral part of many portfolios. By following a disciplined pattern of investing a certain sum of money at regular intervals (traditionally a month), such plans seek to average out the effects of volatility.
For seasoned long-term investors: For the seasoned investor looking to expand his portfolio, a focused growth-oriented stock portfolio will be a favourable bet. Such investors stand to gain if they invest through mutual funds. Not only will they get a diversified portfolio but they will also benefit from the bottom up stock picking approach of fund managers.
Mutual funds add value to one’s portfolio by picking a variety of stocks spanning various sectors. Typically, a bet of 3-5 years delivers optimum returns on such portfolios There are no significant spokes in the wheel that would slow India on the path to progress. The concerns over the end of the “growth story” or the bull run at the stock market seem to be premature. But concerns over the inherent volatility of the stock markets are genuine.
Keep this in mind while choosing various investment avenues—old and new—to build a balanced yet comprehensive portfolio.
(By Vikaas M Sachdeva, Country Head–Business Development, ING Investment Management )
