It is customary for investment analysts and researchers to begin a new year with the question of where people should invest during the year. However, there’s an additional problem, which is the question of which of the new years we are talking about. I can count at least three that occur during a year.
One is the calendar year, which we are talking about right now. Another is the financial year, coupled with the government’s budget. And the third is the year that begins with Diwali, which is of cultural importance to many in the investment community. At each of these occasions, people expect some sort of recipe of how to invest in the year to come.
However, this new year is different from many others. Even at the best of times, investing is an act of faith, and of optimism, but 2012 seems to have begun in the opposite mood. There have been only a few earlier periods when the general mood among businesses and investors has been as pessimistic. I’m all for having a realistic outlook at all times but I think extreme pessimism or optimism can generate their own reality. If people act as if things are going to be bad and take business and investment decisions based on that, then that will become a self-fulfilling prophecy. And if everyone—or practically everyone is doing that, then the prophecy will come true that much more strongly. Of course, the reverse is also true.
Some time back, I read about this interesting psychology experiment, which showed how people would become more cheerful if they were forced to smile. The experimenters asked their subjects to read a comic while holding a pencil in their mouth. One group of the subjects were asked to hold it in a manner that--without them realising--would make their lips take on a smiling shape. It turned out that people whose lips were in a smiling position found the comic much funnier and reported feeling more cheerful after reading it. It’s interesting to note that these people were not even forced to smile—they just unknowingly contorted their lips into a smiling shape and that apparently made them feel more positive. India’s business and investment environment could do with a little more optimism, even if it’s just the equivalent of contorting your lips into a smiling position.
Any reader of Value Research’s magazines and website knows the whole story—sagging profits, stubborn inflation, government deficits, and more tear-jerker episodes of the European soap opera. However, it still seems likely to me that we are in a phase of irrational melancholy—the opposite of Alan Greenspan’s much maligned irrational exuberance.
On the question of the actual investment strategy that an individual investor should follow during 2012, that’s no different for this coming year than it would be for 2011, 2013, or any other year. Investors should map their future financial needs along a time-scale. All money that is likely to be needed in the next two years or so should be kept in fixed income investments. These could be government small-savings schemes or debt mutual funds. All investments intended for a longer period should be invested in a small (four or five, at most) number of diversified equity funds and balanced funds. These investments should obviously be made not in a fits and starts but gradually, using an SIP. This strategy is simple, effective and has the advantage of not having to be reworked depending on the investment environment and the calendar.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
