The economy's slowing, the political outlook is cloudy, and the bull market that turned the most casual equity investor wealthy is gone, gone, gone. Last year's winners are today's biggest losers. Tech stocks? Down 46% in 2001 on BSE IT Index. The broad market is off 24% on the Nifty. The only winners of 2001: Bonds. It can't get more dull than this.
Dearth of anything cheerful for investors is understandable, as every bad news and happening looked temporary and reversible. But the Unit-64 crisis has shocked investors -- not for the erosion in value or the lack of liquidity. But has left investors in awe -- if it can happen to Unit-64, where do we go now? I can well gauge this based on the surge in number of anxious mail and question posed to me not only about the prospect of Unit-64, but about all other funds of UTI, private sector funds, the popular bonds they own of IFCI, IDBI and ICICI.
Lesson from the Crisis: I would not venture into analysis of what went wrong? Why? I am trying to concentrate on lessons from the crisis and an action plan for your savings in the many years ahead. The one thing we learned in 2000 is that there are no guarantees. The ''sure bets'' of many decades can be big flops as well. Investing today takes research, insight and more importantly defining your financial goals and a clear action plan. Unless you settle for a post-office deposit or bank deposit, you can not afford to invest and sleep. You will be faced with the complexity of choosing from a wide array of investment options available.
Goals and Planning: The most common goal any investor has is a simple one -- To make his money grow…. and fast. A valid goal, but a dangerous one. It is not a goal. It is a basic human instinct -- Greed. Dangerous, because it drives you to turn a blind eye to risks, important to guard your savings. And you might end up believing all the "too good to be true opportunities". It is more realistic to zero in on tangible financial goals -- daughters wedding, kids education, retirement, may be a new car in two years time, buying a home and could be anything. The planning exercise itself will help you determine the time horizon for your investments. And this exercise itself will save you from anxiety and risks.
Based on your goals, your investments will qualify to be directed to one of the three broad investment categories. A goal approaching you anytime now, then you should hold cash. Mind you, your idle cash can also work bit harder today, and you can little extra. And ofcourse without any compromising on the safety. For investment goals which are few years away and you don't want to take chances, fixed income investments like bonds or a bond fund will be more suited for you. For your long-term goals, which are many years away and you can withstand an interim volatility, equities and equity funds will be suited.
Back to Investing Basics: Investing isn't gambling or speculation. It is taking reasonable risks to earn steady rewards. It works because buying stocks and bonds allows you to participate in the growth of the economy, which hardly follows a straight line, but over time only goes up. The truth is that the longer you stay invested, the faster your money will grow. This trick is the Power of Compounding, a reliable mathematical certainty.
Where to look?
Cash Options: To stash your cash, you can always leave in your unfixed deposit, which will earn little more than your savings account. But a smarter option will be to invest in a new breed of Cash funds are available, which delivers superior returns than a 15-30 days term deposit with ease of investing and high liquidity. With these funds, you can earn a little bit more on your cash till you consume or deploy, with high safety of your principal. They invest in ultra safe money market instruments -- Commercial Papers (CPs), Certificate of deposits (CDs), Treasury Bills, Call money market. They are very safe, but do not guarantee return but deliver superior return than a short-term deposit with high liquidity.
My take among cash funds include -- Prudential ICICI Liquid Fund (Yield Since Launch – 9.54%, 0.25% load for redemption within 5 days), Birla Cash Plus (Yield Since Launch 9.47%, no load) and Templeton India Liquid (yield Since Launch - 9.76%, no-load).
Fixed Income: For your fixed income investments, steer clear of the clutter -- deposits, bonds and wide variety of funds like serial plans, gilt funds and fixed maturity plans. In fact two kind of fixed income funds can fulfill most of your investment needs. A medium-term debt funds if you want staedy return from your investment and open-end MIPs for your income requirement from your investments.
Medium-term debt funds are attractive fixed income savings vehicle for ability to deliver superior returns, high liquidity and tax efficiency. They posted a strong performance, an average 15.12 per cent return over the past 1-year ending July 31 backed by successive rate cuts this year. Of course, these returns are clearly not sustainable, as it's driven by special situations, negatively impacting the long-term return from these funds. It will be realistic to expect a return of 9-11% from these funds now. My take among the bond funds include -- Alliance Income, DSP-Merrill Lunch Bond, Templeton India Income, Prudential ICICI Income, Pioneer ITI Income Builder, for their above average return with stability.
The open-end MIP are suited for your income needs from investment. These funds won't make you very rich and they also won't make you very poor. But one thing's for sure: investment in MIP's let you sleep at night, not such a bad thing these days. The open-end MIPs are largely a debt fund with a small equity exposure, with an objective to provide regular income with a modest capital appreciation. Besides the high liquidity, serviceability and transparency of these funds is an added plus. As returns from fixed income investments fall, the need to protect your capital and sustain your earnings goes up. And the new generation open-end Monthly Income Plans have strong appeal for investors seeking regular income from their investments while guarding capital against inflation.
And my take among the eight such funds available today includes the MIP of Alliance Capital and Templeton for impressive but brief track record and their consistent marginal allocation to equities.
And for the long term…. Things look too depressing for any case for equities, based on their recent performance. But for you long-term goals you can avoid equities only to settle for lesser return, as equities prove to be the best performing asset class over the long-term. And perhaps equities at their all time low, they present a good case if not a compelling one, as I don't know when it will make a comeback.
There are three things, which you can do to avoid the equity pitfalls. Invest for the long-term, invest regularly and diversify. Following these basic rules, you will avoid the key risks of equity investments. Long-term investment horizon will help you tide over the extreme gyrations of equities. Regular investing will help you avoid nasty timing of your investments. And diversification helps you ensure that at any given point of time, if a part of your portfolio is down, a larger part of your holdings should be up and overall, your investments are doing fine. These enduring principles of sound investing that have served investors for decades. However, often the thinking is that all you have to do is buy a single stock and watch it go up 150%. The trade-off for the balancing of risk and return in a diversified portfolio is that your overall return might be lower than you could get in a concentrated portfolio. And in the long-term, a diversified portfolio will give you steady returns and comprehensively beat the returns of all other asset classes – bonds, gold etc.
For the uninitiated, diversified equity funds could also be the stepping stone into the world of equities. Simply put, these funds build a portfolio of stocks, chosen from various sectors and reduce the risk associated with a particular industry.