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The Fund Dos and Donts

Don't act on uncertainty. Go with what you know -- your plan based on your income and spending needs in desired time horizon and risk tolerance.

The attack on America has its severe effect on all parts of our markets -- equities, bonds, and currency as well. Its effect on the Indian equities is visible much before it shows on Wall Street. The BSE Sensex tanked -- 353 points (11.04%) during the week, to its December 1998 level of 2830. Indiscriminate selling in uncertainty dragged the market on a free fall. Indian software and oil stocks were on a free fall. The huge institutional offloading of IT stocks having a major presence in US markets led to a 15 percent dip in the BSE IT Index. And 50 of the 105 open-end equity funds lost more than 10 percent during the week. The big losers were of course the large technology funds -- Alliance New Millenium (-17.29%), Prudential ICICI Technology (-15.25), Pioneer ITI Infotech (-14.77%) and UTI Petro (-14.21%).

Bond market too turned volatile with added uncertainty dragging bond prices. Gilt funds have lost an average 0.25 per cent while the more conservative medium-term bond funds have shed around 0.10 per cent. With a likely US counter - rupee on a free fall, investors are beginning to take refuge in the "safe" haven of cash funds. The rupee hit a new lifetime low of 47.83 on Friday under panic demand for the greenback. In the last fortnight, the Indian currency has lost nearly 1.45 per cent.

The equities in the middle of a bear phase, the current events do not impair the medium and long-term outlook for equities. Great uncertainty is driving fear leading to the sharp fall. In the past on such special situations -- like the gulf crisis and Kargil war, markets recovered fast soon after. Besides, securities firms and corporations in US have decided to buy shares in concert to prevent a free fall in prices. SEC has also allowed easy buyback of shares by companies. This might prevent a market crash, as discounted by the Indian markets. The outlook for equities largely remains as it was before the attack.

What to do now?
Though it's impossible to predict what will happen to market as the events unfold. Indiscriminate selling will not help, and this kind of overreaction will lead you to sell at the bottom. Selling now will make sense if it turns out that stocks would continue to fall over an extended period. One can not predict if that's likely to happen, but it's far from inevitable. I don't know if the Sensex at 2800 is the bottom of the current bear market. But thinking about the long-term economic impact on the Rs 22,000 crore Indian economy does not seem too great compared to problems we're already facing -- the economic slowdown and retarding FDI. The crisis at its worst will be a short-term issue but not a long-term problem.

Uncertainty drives fear as well as greed. And investment decision solely based on either could be injurious. Last year uncertainty powered greed. The current uncertainty is scary. We know well what happens when we buy, but don't know why. Likewise, if we sell in a panic without waiting to find out why, we are likely to throw away good investments in the process. Don't act on uncertainty. Go with what you know -- your plan based on your income and spending needs in desired time horizon and risk tolerance.