Extraordinary times ask for extraordinary courage. When your last two years gains have all been wiped out and you begin to see a erosion in your capital, you may not agree with us but there are always smart moves and smart ways of using opportunities that dark moments like these throw up.
We have always maintained that Equities are for the long term. But are they really?
We need to follow the rules of portfolio investing to get the benefits of long term benefits of equity. The one way to book profits is to rebalance our portfolio. When we do that, we automatically book profits of the investment that has gone up.
Imagine that you have Rs 50 each in debt and equity and you are happy with a 50:50 asset allocation. Now a rising stock market takes this Rs 50 in stocks up to Rs 100 and your debt investment grows to Rs 60.
You are now at an allocation of 40:60. You need to sell equity to come back to a 50:50 asset allocation. If you went on doing this, you would have automatically booked profit when the markets were high.
The rules are: you have to decide on an asset allocation and stick to that. Even if it means selling a product that is rising in value.
If you haven’t rebalanced portfolio, that's the first thing to do. But what else ? what are the five most immediate steps to build wealth in today’s market. If anyone is telling you don’t sell, we disagree- You just have to.
Throw duds out
Throw the garbage out. Stocks and equity funds which have underperformed the index in the bull run and the bear run. 2004-2007 December was your bull run- Check which stocks and funds gave you returns less than Sensex or Nifty. Also check if these stocks and funds have fallen more than the index between January this year and to today. If the answer is yes, throw them out at whatever price you get. These are duds and you should and switch to better quality investment.
While the list here could be long, we've culled out some of the worst performers amongst diversified equity funds over the bull and the bear run.
JM Equity: Negative 44 per cent in one year and a dismal 2 per cent in over 3 years.
Birla Sun Life India Opportunities: Minus 42.74 and minus 3.09
Principal Growth: Negative 42.1 10.55
Escorts Growth Plan: Minus 42.09 4.58
DBS Chola Multi Cap: Minus 41.60 3.61
There is a case for linking performance to fund costs. And poor performance also makes us look at the risk of a fund manager underperforming the market, while charging us fees all the while. 2 to 2.5% of your money each year will go as fees to the mutual fund, irrespective of performance.
After you throw out the duds, what do you do with that money and the incremental savings each month?
Go out and start tanking up on equity. These valuations will never come back again. We don’t know where the market will bottom, but a staggered equity investing strategy will work. If you have Rs 1 lakh to invest, put in Rs 10-20,000 every month for the next few months. Best way to ride the market now is to invest in Nifty BeES, if you don’t know either stocks or funds at all.
What to buy?
Nifty BeES is an index fund which is simply a mutual fund that buys all the stocks in an index like the Sensex or Nifty and you get returns that equal the performance of the index. Three reasons to buy an index fund:
Lower risk. You are cutting the fund manager risk to zero. This means that your return is no longer depending on the efficiency of the fund manager, but you are just riding the public transport to get average return.
Lower cost. We've spoken about three costs to watch out - entry, on-going and exit. All 3 are the lowest in an index fund.
Safest bet: Safest way to get an equity exposure and ride up the market over the next 10 years. With the market at these mouthwatering levels, we know that once the world shakes off these troubles in the next few years, markets will go up again. That is certain. What is not certain is which stock or which fund will really do well. We can conjecture, but no guarantees. A study by Outlook Money showed that in 12 years the index is a zero risk investment. If you invested on ANY day and held the investment for 12 years, you would have made a 15 per cent return!
The ONLY product you need to buy is the Nifty BeES ETF. To remind you once again. This can be bought online through any of the brokerages or from your stock broker. It is mutual fund that is listed like a stock. So, begin tanking up on the Nifty BeES over the next six months.
The one good outcome of this mayhem is that interest rates are now turning around. Central governments across the globe and RBI are cutting rates to increase liquidity in the economy. Logically, interest rates on savings and loan products should come down. The two things you should be doing in this scenario.
Invest in FMPs & FDs
You should invest some amount in the next one week in FMPs or Fixed Maturity Plans - these are currently offering returns of 11 per cent. You may not get these kind or returns going forward, so lock some funds which you have for debt allocation in FMPs.- but only after seeing your asset allocation. If you already have enough debt, don’t increase it. While taking FMPs, be careful. Some of this is junk paper, go with good fund house and triple aaa ratings. If you want a zero risk product, you can park it in a bank FD. These rates also seem like they have peaked for the moment. So a one year FD offering 11-12 per cent is a good idea.
Buy a Home
Slowdown in the economy should help soften property rates. Couple this with cheaper home loans. So all of you who've missed the boat, check your savings to ensure you will have enough for a down payment. Six months down from now, you could get good opportunities for home buying.
Hedge with Gold
It makes it safer, less volatile and more liquid. Specially as the world looks ready to slip into a recession and there is global uncertainty, gold becomes well, solid gold! Money begins to move into gold in times of uncertainty.
5-10 per cent of your portfolio needs to be in gold. But gold only through a gold ETF. Good products out there from Benchmark Gold BeES, Kotak and UTI have good gold funds in the market.
Smart things you can do to beat this bear market.
ICICI Direct Recommends:
Keep a list of stocks that you want to buy ready - and start tracking their movement.
Know and reevaluate a stock you hold. If you still believe in the potential of the stock - hold on.
Put your money to work for the long term. Don't get caught in short term performance.