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Uncertain Opportunity

Equity markets are not meant for the faint-hearted

The markets have been on a roller-coaster ride, but is this the right time to invest in mutual funds?

Markets, by their very nature are uncertain. If one thinks that the markets are a fixed deposit and would give a 20 per cent fixed return, then one is very wrong. Markets are uncertain and there are losses thrown up in very short time periods. Equity’s basic premise is that you are taking a risk. When you buy a particular company’s share you are basically becoming the owner of the company and at the same time taking in all sorts of business risks, be it environment, company, economic or counterparty. If you cannot take such risks then stay away from the markets.

These uncertain times also create some special opportunities. If you want to take the maximum advantage from the markets, then steps should be taken to minimize risk factors. For that firstly, one should not invest a large amount at once, as there is always a chance of ‘piling’ when markets are at its peak. Secondly, one should diversify and mutual funds help you do that greatly. Business never stops and this is the basic premise for investing in equities. Equities are known to give better returns in the long run rather than fixed income. If you believe in these two modules, only then should you invest in equities or else not.

Why have the NAVs of IDFC Bond Fund and ICICI Prudential Income Fund been falling since January 2009? There is no improvement. What are their prospects in the times to come?

They have fallen because in the last quarter of 2008 we saw a big market crash. The big gains happened when nobody was into income funds. Lots of funds came into income funds and started buying bonds in anticipation of further rate cuts. We saw it in the last quarter of 2008, but nothing has happened. On top of it, the government’s massive borrowing programme has ensured that the yield has not softened.

I would say that investing through income funds is fairly complicated. One has to take a view on the rates and there are confusing signals. Even now most fund managers are unsure whether there would be rate cuts or a status quo. Going by the liquidity, it looks like interest rates may not go up, but on the other hand on the borrowing programme side, it looks like nothing can stop the rates from going up.

From January you would have had nominal losses by now and if you are extremely uncomfortable, with the decline in value, which most investors, particularly fixed income investors like you are, then don’t try to recover your losses completely. If you are one or half a per cent down from the value at which you invested, square up your losses, take your money out, get into a short term bond fund or put your money in banks which would give you reasonable returns. Off course it would be a bit less tax efficient, but that’s the way to go about it.

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