Housewife Kamakshi Janardhan, 28, built a portfolio of software stocks in March 2007 when the going was good- inflation was benign, industrial growth was robust and the economy showed no signs of strain. Among the stocks she picked was Infosys Technologies, at Rs 2,010 per share. In September 2008, the stock is down to Rs 1,445, having touched a low of Rs 1,255 earlier, and her overall portfolio is down 25 per cent following the fall in stock prices. Janardhan had borrowed money to pay for a part of her portfolio. So, the falling market and interest payments were a double blow. But she's unperturbed. "The markets will bounce back in a few months," she says.
The value of most asset classes has dipped in recent times. Even those who put their money into what many reckon to be a safe bet- debt instruments-have burnt their fingers. The real returns (nominal returns minus inflation) have been negative for a long time now. While inflation is hovering at more than 12 per cent, investors are making a maximum of 11 per cent on their debt funds. On the other hand, expenses have gone up, resulting in lower savings for the investor. Gold, too, has dropped from more than Rs 13,000 per 10 gm in mid-March 2008 to Rs 11,500 before recovering to Rs 13,000-levels in the last week of September (see page 186). Not surprisingly, many investors are being squeezed in this market. But you should use these tough times to consolidate your position. Experts see opportunity in the current bout of calamity. Here are a few strategies that will help set you up for the next wave.Think long-term
The first thing a person playing the stock market should figure out is what he wants to be-an investor, trader or a speculator. "Unfortunately, most people are unable to make that distinction. When they want to be investors, they unwittingly end up being speculators," says Ashok Jainani, Head (Research), Khandwala Securities, Mumbai. Investors look for absolute returns from equity in a short time. But in the short-term, equity markets are volatile.Don't shun equities
Just because markets have tanked in recent months, and consumer goods inflation is ruling high, it does not mean the macroeconomic conditions will remain like this for long. "Inflation will cool off from now on," predicts Om Ahuja, Executive Vice President & Country Head (Investment Management), YES Bank. He expects the volatility to continue for another six-to-nine months, and reckons it is time investors looked at investing gradually. "Everyone should participate in equity irrespective of the market scenario," says Siddharth Bamare, Head (Investment Advisory), Angel Trade, Mumbai. Equity has, historically, delivered higher returns than any other asset class over the long term. "If you have knowledge and time, you can trade yourself. Otherwise, invest in mutual funds (MFs). In these volatile times, one should invest for 6-12 months in a systematic investment plan (SIP)," he suggests.
Revamp your equity holdings
Bad times are a good time to rid yourself of dud stocks and concentrate on robust, profitable companies with growth potential. These growth stocks also take a beating in a falling market. But that should spell opportunity for long-term investors. Don't worry about booking losses on your dud stocks as they might take a long time to move in a recovery. Solid growth stocks will be the first to move, but take a stock specific approach. Says Jainani: "Concentrate on large companies with strong businesses." Then, investors can diversity their funds across portfolios within and outside the country. "That will help spread the risk, away from just one country. It is equally important to keep watching futures and options (F&O) market, which one must approach from a hedging perspective," adds Bamare.Try debt FMPs
Those unwilling to risk the markets have opportunities in Fixed Maturity Plans (FMPs). With interest rates shooting up, they can provide a higher allocation to such products. "Of course, an investor needs to ensure a good portfolio of underlying papers in the FMP. Liquid funds are a good option and tax-efficient, too," says Samir Bimal, Country Head, ING Private Banking, India. When markets swing wildly due to short-term events, investors must move into liquid funds, suggests Jainani. But Ahuja expects interest rates to come down over the next two-to-three quarters, and, therefore, feels that investors can consider parking their money in high-yielding deposits and debt instruments like FMPs, which can give them good yield for 12-13 months, and tax benefits, too. While they may not beat inflation, they will help reduce the losses. "The time has come for investors sitting on cash to deploy it in high yielding portfolio deposits and FMPs," says Ahuja.
Stick to your financial plan
If you already have a savings plan, don't deviate from its objectives. It's vital as it gives you the discipline required to make investments in times of distress. You also need to keep a positive cash flow and spend less in tough times. Many savvy investors have used this extra cash to make aggressive investments. Also, don't forget your asset allocation. "Do a proper asset allocation depending on the market scenario and your own risk profile. It depends on your age also. Youngsters can take on more risk by increasing their exposure to equity," says Angel Trade's Bamare.Stay on trackEight tips for a better tomorrow.
• Don't attach much importance to short-term events
• Keep your bank accounts in order; be credit-worthy
• Clear old debts before it's late. High interest rates may haunt you later
• Deploy surplus cash in highyielding deposits/instruments. You will get positive real returns when inflation eases
• Pick value stocks trading at a discount for the long term
• Seek professional help and build an investment portfolio that suits you
• Avoid freely offered stock tips. If everyone knows it, how can you make money?
• Be clear in your mind on what you want to be: investor, trader or speculatorConsult professionals
One can, in fact, avoid messing up one's finances and meet targeted returns with professional help from outside. "The advice of a professional adviser/organisation is crucial to the investment decision making process," says ING's Bimal. Indians are the biggest savers in the world, but many get their calculations wrong because they tend to copy a plan that best worked for a friend or a relative. "Avoid tips that are freely offered. These are for speculators, carry high risks and there's a higher probability of going wrong. How can you make money if a piece of information is known to everyone, and that too, before you?" asks Jainani.
Bimal explains that an investment strategy differs from person to person depending on one's goals, risk tolerance, age, income, earning potential, etc. It's only after assessing all these that a portfolio strategy can be created to help the investor achieve his financial goals in a tax-efficient way.
The current bout of uncertainty is unlikely to last for long, given that the Indian economy is still growing at a fast pace-the worst case scenario projects a GDP growth rate of 7-7.5 per cent. Oil prices are down. Inflation will dip eventually. And demand should continue to improve. But before things change in the economy, it's time for investors to tweak their financial situation to set themselves up for future growth.
Dos and don’ts
• Economic crisis. Market meltdown. Rising interest rates. Rising inflation... times are, indeed, tough. Here are 10 recommendations on what you should and shouldn't do to keep your financial health on track.
What you should do
• Follow the news. Swinging markets and new regulatory initiatives... things are changing quickly. Each development affects different sectors differently. Follow the financial media-and Business Today's Money section, for instance-to keep abreast of the latest developments in India Inc. and for advice on how to profit from them.
• Get your finances in order. There has never been a better time to make a budget and start paying off your debt and credit cards, personal loans, etc. If possible, transfer your loans from a bank that's charging a higher rate of interest to one that promises a cheaper rate.
• Rethink your plans to retire. If you're expecting to retire soon, consider holding off for a while, if possible, until things calm down. That will give you time to reassess and, if need be, modify your plans.
• Call your financial adviser. With end-of-the-year tax planning an annual ritual, now is a good time to make an appointment with your tax adviser, no matter what the economic outlook. He or she may have some advice on how to tweak your finances as you ride out the current storm.
What you shouldn't do
• Bail out. Dumping your stocks or equity mutual funds now, when values are especially low, will guarantee that you turn paper losses into real ones. Even if there's more downside to come, staying on course often pays off during times of economic uncertainty.
• Stop saving. Those regular contributions you've been making to your savings or retirement accounts are an important part of good financial discipline, and there's no reason to stop them now. We've long recommended the virtue of making regular, monthly savings. Continue this habit, even if it means cutting down on other things. like the weekly family outing, or that after-office drink with friends.
• Speculate. While lower prices of shares, create opportunities, speculation can get you into big financial trouble. Avoid it.
• Take on new debt. Be careful about acquiring new debt. Economic downturns can affect job stability and investment incomes, making it difficult to determine how much debt you can handle. If you must borrow, say, to put a child through college or to buy a house, be doubly sure that you've examined all the options and risks.
• Stop living. Although these times demand extra caution, there's such a thing as over-reacting. So, don't overreact. Reflect carefully and, where necessary, adjust. But don't stop enjoying the little things of life. You'll only make yourself sad.