When in doubt...

...ask the expert. Two financial planners answer readers’ queries about riding the current market volatility.

Print Edition: November 13, 2008

Q. I am a government employee and have received a lump sum as arrears. I want to invest in direct equities. Is this a good time to do so? Or should I wait for the markets to bottom out?

A. Nobody knows when the markets will bottom out because timing it is extremely difficult. If you want to invest a lump sum in a volatile market, the best strategy is to park it in a liquid fund. You can then transfer a specified amount to equities at regular intervals through a systematic transfer plan. This is ideally done with a mutual fund, but as you prefer direct equity, take well-researched decisions and plan for portfolio diversification. Also, don’t forget to first have a financial plan made which takes into account your current net worth, life stage, risk profile and financial goals.

Q. I started two SIPs in a diversified equity fund in March 2008. The current market condition has shaken my confidence. Should I continue with the SIPs? My investment horizon is between 3 and 5 years.

A. The biggest advantage of investing through the SIP route is rupee cost averaging because you buy when the market is up as well as down. If you stop investing in SIPs when the market falls, then the purpose of systematic investing and rupee cost averaging is defeated. It’s true that the investors’ confidence in the markets goes down when there is a sharp fall, as has happened recently, bBut the best opportunities emerge in troubled times. Your investment horizon of five years is good. So you should continue with both the SIPs.

Q. I bought 300 shares of a company at Rs 295 each in October last year. Now their price is down to a 52-week low of Rs 125. Should I buy more and bring down my average cost?

Deven Shah (left)and Charul Shah
Deven Shah (left)and Charul Shah

A. As a thumb rule, you should avoid averaging out the costs. The additional money that you want to put in now is a fresh investment. There may be another stock that offers a better buying opportunity than the one for which you want to average out the costs. Let’s assume that when you bought this stock in October 2007, you had considered the fundamentals of the company and had definite reasons to anticipate a rise in its stock price. If both these reasons hold even in the current scenario, only then should you buy more stocks to average out your costs.

Q. In 2005, I bought a Ulip for which I pay an annual premium of Rs 25,000, but only Rs 17,000 is invested after the charges and deductions. Due to the stock market fall, this value has come down further. Should I surrender the policy or continue with it?

A. Ulips have a lopsided expense structure and the charges in the first three years are the highest. Many people are misled by agents into exiting their Ulips after three years. This is a costly mistake because the high charges in the initial years eat into the returns and the investor usually suffers a loss. Buy a Ulip only if you are ready to invest throughout the tenure of the policy (or for at least 10 years) and if you believe that equities will give good returns over the long term.

One very useful feature of a Ulip is that you can switch the corpus from debt to equity depending on your reading of the market. If you are uncomfortable with the way the markets are performing and expect an even greater fall, switch to the debt option in your Ulip. This would also mean foregoing the option to make up for your losses if and when the equity markets bounce back. Splitting the corpus between debt and equity might help you strike a balance. Having said that, remember that Ulips are long-term investments. So you should continue investing regularly and stop tracking the price on a weekly or monthly basis.

Q. I maintain a 60:40 equity to debt ratio in my portfolio. Due to the recent drop in the value of equity investments, the asset allocation ratio has changed to 45:55. Should I rebalance my portfolio in the current situation? If yes, how?

A. Congratulations for following a disciplined approach and maintaining an appropriate asset allocation. Yes, you should look at rebalancing your portfolio in the current market. However, it is difficult to suggest a strategy without knowing the specific details of your portfolio, risk profile, priority of goals and time horizon. What we can recommend, however, is that it may be a good time to have a review meeting with your financial planner to reassess your risk profile and re-look at the complete asset allocation of cash, debt, equity and other asset classes. Also re-align your investment portfolio with your short-term and long-term financial goals.

Q. I chose the dividend option in equity mutual funds for a steady cash flow. Now that the funds are losing money, they may not offer dividends. Should I switch to the growth option?

A. The manner in which a mutual fund distributes dividends is very different from the way a company pays its shareholders. A fund may give a dividend even if it has lost money in the past year as long as its NAV is higher than the price at which the units were offered. In your case, there is no need for the switch.

Answers by Deven Shah, business head of Money Mentor, and Charul Shah, certified financial planner

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