Business Today

The tough get going

A beaten-down market, falling asset prices, and a negative real return are hurting investors. How should you ride out the storm?

K.R. Balasubramanyam | Print Edition: October 5, 2008

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.

Om Ahuja, Executive Vice President & Country Head, Investment Management, YES Bank
Om Ahuja
Among the stocks she picked was Infosys Technologies, at Rs 2,010 per share. In September 2008, the stock is down to Rs 1,700, having touched a low of Rs 1,255 earlier, and her overall portfolio is down 25 per cent following the fall in stock prices. Kamakshi had borrowed funds 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 11,700 in the second week of September.

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 oil and consumer goods inflation have climbed steeply, 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 of Investment Advisory at Angel Trade, Mumbai. Equity has, historically, delivered higher returns than any other asset class over the long term.

Ashok Jainani, Head, Research, Khandwala Securities
Ashok Jainani
“If you have knowledge and time, you can trade yourself. Otherwise, go for 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.

 Stay on track

Eight tips for a better tomorrow.

  • Don't attach much importance to short-term events

  • Keep your bank accounts in order; be creditworthy

  • 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 speculator
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.”

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 the 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 highyielding 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 having greater exposure to equity,” says Angel Trade’s Bamare.

Consult 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. Since Indians are the biggest savers in the world, many often get their calculations wrong because they tend to copy a plan that best worked for a friend or a relative. But, as Bimal explains, an investment strategy differs from person to person depending on his 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 long, given that the Indian economy is still growing at a fast pace. 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.

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