You don’t need a rocket scientist, Investment is not a game where the guy with 160 IQ beats the guy with 130 IQ
We are going through challenging times. There is correction in the equity market, defaults in debt funds and even issues with certain banks. Many investors are wondering what is ‘safe.’ Nothing has changed fundamentally in our economy or the financial markets. Due to COVID-19, economic growth has been impacted, but we will come back over a period of time. There is no reason to suspect something is going wrong with investments in general. To put the current situation in perspective: the equity market, in particular, the global markets, pre-COVID-19, had a significant run up.
There was a lot of surplus liquidity floating around (there still is) and that pushed up prices in equity markets in advanced economies. In India, the equity market had moved up but more at the index level (Nifty, Sensex) and in large cap stocks. The broad market, taking all listed stocks into consideration, had not moved up as much. After the pandemic, the sharp correction has been inevitable as advanced economies are staring at a recession.
In India, mutual funds are generally handled by fund managers, also referred to as the portfolio managers. They are responsible for investing the fund’s capital and produce capital gains and income for the fund’s investors. They also maintain a structured portfolio to match the investment objectives.
Understanding Mutual Funds
Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The value of the mutual fund company depends on the performance of the securities it decides to buy. So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio’s value. Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock, mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one
The correction is going to happen:
The defaults in debt funds happened due to multiple reasons, the major one being the cleaning up of the system. Earlier, the practice of ever-greening was rampant i.e. granting one more loan so that an existing loan does not go bad. With stricter regulations, including the IBC, some companies were taken to the NCLT. The risk in debt in still there as the economy has slowed down but it is not so alarming as to make one exit all one’s debt investments. For now, due to the challenging situation, the government is supportive and going slow on entrepreneurs.
Concerns due to the reasons mentioned above and their impact on your investments are natural. It is in human nature to make an investment without caring about risk factors. Afterwards, when something breaks out, people tend to over-react to the risks by moving out of the investment at the wrong time (when prices are low) or trying to pin the blame on somebody.
What should you do?
First, decide which asset categories you want to invest in. The investment avenues are equity stocks, debt i.e. bonds and, to a limited extent, other investments such as gold and real estate. You may invest either directly i.e. purchase shares or bonds, or, do it through a vehicle such as mutual funds. Every investment avenue has its own worth, return potential and risk factors.
If you are managing investments yourself, you have to do the research and convince yourself about what you are getting into. [About] 30% correction in the equity market is not unheard of in history; the question is whether you are aware of it and mentally prepared for it. Defaults in bonds is a potential risk; what is happening over the last one-and-half years is on the higher side and unnerving investors.Once you decide which asset you want to invest in, decide how much to invest and into which category.
Growth potential remains
The growth potential of the Indian economy remains the same, only that there is a dull phase till we come back from the lockdown. In assets such as equity, you should keep as much as you can for a long period of time, without worrying about day-to-day returns. For debt investments, which is preferably done through the mutual fund route, there are risks of volatility and default.
Gold as an Asset
Gold, as an asset, does not produce anything; its value increases in times of uncertainty like war or a pandemic. Hence, the allocation of your funds to gold should be of a lower proportion. Your investments should be productive, not just depending on uncertainties to prolong.
If you raise the concerns before making the investments, you can save yourself the hassles of agony on negative returns in a particular phase or defaults in debt, and sleep peacefully.
Communication
The other aspect you have to take care of is the communication gap between you and your services provider.
You are investing your hard-earned money and you have to be clear about what you are getting into. For this, you have to ask the relevant questions and convince yourself: why it is suitable for you; how long you have to stay invested; and what the potential for negative surprises is. The only reason to exit an investment prematurely is if the nature of the investment itself is changing, which is not the case now.
Disclaimer: All the views in the Blog is personal of the author not attributing to anyone.
