In the wake of the recent market crash, India’s benchmark index Sensex shaved off as much as 1,000 points in a single day and lost more than 13% from the peak levels in August.
The roller-coaster jumps and wild swings in the Indian stock markets are set to continue for some more time, perhaps till the next general elections in seven months.
The market plunged further when the Reserve Bank of India decided to keep interest rates unchanged, leaving retail investors sceptical and worried about their investments.
No respite is seen in view of the political instability, mounting pressure on the economy on all fronts, spiralling crude oil prices, mass exit of foreign institutional investors and a fathomless fall in rupee value.
Strategy to protect capital
During such uncertain times small investors, particularly NRI investors, grope in the dark for direction and are guided by the herd mentality of exiting the market in a jiffy when it is in the tight grip of bears.
Those who invested lump sum in equities or equity mutual funds have seen their investment value depreciated. Then what should be their strategy to protect their capital? Investment advisers suggest a reallocation strategy by shifting funds to safer avenues.
“My advice is to shift the funds to different choices like migrating to debt funds or switch to US-focused INR funds which have shown good performance in the past one year,” said Jojo James, chief executive officer, Fosbury Wealth Managers, and Partner of Tamim Chartered Accountants.
This need not be a long-term strategy. These avenues are suggested only to protect the wealth for now. For the longer term, India-focused instruments are the best in view of the resilience power of the Indian economy.
Small investors face a dilemma every time the markets tumble and they end up making the wrong choice of stopping their SIPs in equity funds or redeeming their investments to avoid further losses.
“Corrections are a temporary opportunity but growth is permanent. In 2010 Sensex corrected by 28% in one year, but it jumped by 96% in three years.
“Therefore, small investors should keep invested during this time of a rare volatility opportunity period and do not expect any miracle during the next 12-15 months. Post this period, a return of a minimum 20% in equity mutual funds can be expected,” James said.
Switch strategy not for long
But not all advisers subscribe to this switching strategy or lump sum investments in mutual funds. The recent rupee fall has seen a good number of NRI investors flocking to portfolio managers to invest in mutual funds in lump sum.
NRIs are allowed to invest in mutual funds in India on a repatriable or non-repatriable basis subject to regulations prescribed under the Foreign Exchange Management Act (Fema).
When one thinks about mutual fund investments, it becomes difficult to make a choice between systematic investment plans (SIPs) or lump sum. Even though SIPs are preferred mode, investors often choose to initiate lump sum investments.
“The relatively long bear phase coupled with extreme volatility is the right time to start investing in equity mutual funds through SIPs,” said Manoj Vallikudiyil, partner Manjul Associates, securities and investment consultants.
“During a volatile market phase, one would not advise to invest lump sum in mutual funds because it entails timing the market well. What investors, NRI investors in particular, should do is to consider investing through the SIP route, to benefit from rupee cost averaging. They should avoid the risk of timing the market, irrespective of the market movements.”
Low risk options
Risk tolerance also determines your mode of investment. High-risk investments like equity funds are able to deliver better returns through SIPs than a lump sum. Lump sum investment involves putting chunks of money at risk all at once. So, it is advisable to diversify your investments across fund houses and fund categories.
James advises: “In case you have received a huge chunk of money from the sale of property in India or got a good amount to remit to take advantage of the good exchange rate, you may park the lump sum in a low-risk debt fund for an intermediate horizon. Later, one can initiate a systematic transfer plan (STP) from the debt fund to the equity fund.”
