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Golden rule of investing

Don't panic, don't predict


PLAYING SAFE: Fixed deposits are ideal as short-term investment options;investors should allocate at least 10 per cent of their assets to gold

Market experts say equities are still the best bet for investors with long-term investment goals. Those in it for the short haul should stick to debt.

The upheaval in the markets may have turned many investments into duds but this is no time to panic. Investors should be prepared to play the long waiting game in equities as economic conditions remain grim and uncertain, say financial planners. So far in 2011 (till December 14), diversified equity funds have lost 20. 5 per cent, while the sensex and nifty have lost nearly 20 per cent each.

This is the right time for those with long-term investment goals to beef-up their exposure to equities, say experts. However, investors with a short-term outlook should clearly stay away from equities, and rather look at fixed income instruments, say advisors. Even traders who do not have the capacity to take losses would do well to stay away from the current volatile market. In the short term, only disciplined traders with nerves of steel can float safely, say marketmen.

The general tendency during such turbulent market conditions among those who have long-term financial goals is to lock-in money in debt instruments and reduce exposure to equities, says Gaurav Mashruwala, a certified financial planner. "It should actually be in reverse, " he explains. A person with long-term commitments such as a wedding in the family or education for the child should invest more in equities, he says.

"The portfolio should be based on individual requirements and not on market conditions, " say advisors. "We usually recommend equities for those with a 9-10 year outlook and debt options for investors with near-term requirements, " says Mashruwala. His standard advice for investors: "Don't predict (the markets) but prepare (for uncertainty). " This is also a strong pointer to the golden rule of investing: Be prepared. Don't predict. Don't panic.

To prepare oneself, one would do well to look at history. The last downturn in equities, in 2008-09, lasted nearly 15 months. And at the beginning of the millennium, the downturn in the market had lasted for over three years, from early 2000 to the middle of 2003. However, it can not be predicted for how long the current one would last, say experts. For the current downturn, if we take November 5, Diwali day in 2010, as the point of departure, we are already 13 months into it. So backed by the history of the Indian market, financial advisors opt for fixed income solutions for investors with a short-term investment horizon. "Investors with a one-two-year outlook should put their money in debt options as we don't know when the markets would recover, " says Suresh Sadagopan, principal financial planner, Ladder7 Financial Advisories.

And these fixed income options include not just the plain vanilla bank fixed deposits. Investors should also look at fixed maturity plans (FMPs) of mutual funds. The advantage of FMPs over FDs is in their tax treatment. While all the interest that is earned from FDs is taxed in the hands of the investor, FMPs, on the other hand, when held for more than a year, give the investor an indexation benefit. According to financial planners and taxation experts, this is the most lucrative aspect of FMPs over FDs.
While investors with a short-term investment horizon could look at bonds and other fixed income instruments, for long-term investors who can afford to take some risks by investing in equities, the good news is that market downturns like this could be turned into opportunities.

The downturn in 2000-2003 is a case in point, say advisors. "Equity investors can wait and buy stocks at low valuations. It is a good time to cherry pick stocks, " says Abhinav Angirish, founder, investonline. in, an investment advisory. "Young and new investors who have time on their side should hold on as long as the fundamentals of their investments are sound. It is also a good time to increase equity SIPs (systematic investment plans). "

Consider this: Among the 30 sensex companies, 10 have recorded new 52-week lows in the last one month, and many more are hovering around the same level. This definitely makes for a strong case to buy into equities now, but then again one should remember that the Indian economy is yet to show any sign of bottoming out. So a number of financial advisors recommend that investors can start systematic investment plans (SIPs) with mutual fund schemes that have good track records. Going for an SIP would help investors to stay away from the lure of predicting the market, and riding the whole upturn, whenever that happens.
Another attractive investment option is to target companies that have a history of paying good dividends. If one can enter such stocks at current low valuations, then there is a probability of getting a high dividend after the year ends, and that too taxfree. This is because when dividend is distributed by the companies, it is taxed, but it is not taxed in the hands of the shareholders.
Attractive valuations of stocks, however, should not lead one to change his/her original asset allocation plan drastically, if it has already been done. "There is no need to change asset allocation because of market conditions, " say advisors. But investors can re-balance their portfolios by buying more equity-related products to compensate for the decline in stock prices. They should also allot at least 10 per cent to gold, a traditional hedge against inflation and a difficult economic environment.

Experts also have a word of caution on the slowing economy and suggest ways to deal with it. Investors should also have a sufficient contingency fund for any emergency in case of a lay-off. Employees should opt for a separate health insurance plan as these benefits could be withdrawn as part of costcutting measures, say experts.

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