Invest In India

A comparison between the early days of Samvat 2065 and 2064 throws up a tale of contrasts. While the mood last year was celebratory, buoyed by the belief that the only way for the Sensex was up, this time round, investors are grappling with dark predictions of the bottom being nowhere in sight.

Though the festive season in India will end only after the New Year revelries on January 1, the market seems to have exhausted its stock of fireworks in ’07 itself.

Financial planners, however, believe that all is not lost for those who have burnt their fingers in the financial explosion. Here are some tips for investing in mutual funds (MFs) that can help you stay afloat in a choppy market:

TIME FOR CHERRY-PICKING

During Diwali, consumers are bombarded with the terms ‘attractive exchange offer’, ‘buy-one-get-two-free scheme’, ‘free gift’, and so on. However, the equity market seems to have stolen a march over consumer goods companies in offering discounts this year.

It has been offering a plethora of blue-chip stocks at huge discounts, making the oft-repeated campaign slogan ‘unbelievable prices’ believable for a change. This is the right time to shop for Sensex heavyweights that are beyond small investors’ reach otherwise. “Large-cap funds are the first ones to go up in a rally.

Therefore, you need to put your money in large-cap funds with a good track record,” suggests Amar Pandit, director, My Financial Advisor.

EMPHASISE ON TRACK RECORD

The next criterion for deciding which fund you should buy or stay invested in should be its track record.

Don’t pick or dump a fund based on its recent performance.

Opt for a fund that boasts of a sustained good performance over three-year or five-year periods (even if its returns have dipped in the recent past), rather than choosing a fund which generated dazzling returns in the year-ago period, with no track record to boast of over the past three years.

“Also, the focus shouldn’t merely be on returns, but on the risk taken to generate such performance as well,” points out financial planner Gaurav Mashruwala. If the above-average performance comes at the cost of higher risk, it may not be worthy of a place in your portfolio.

PLAY SAFE, DIVERSIFY

Investors would do well to make sure that they do not keep all their eggs in one basket. Performance of sector funds varies according to the factors affecting their respective industries. If a large chunk of your portfolio is skewed towards just two or three sectors, any adverse changes in those sectors can leave your portfolio battered and bruised.

Hence, it is advisable to opt for diversified funds, where an unfavourable development in one particular sector can be balanced by an encouraging sign from another sector. Diversified funds also act as a firewall against sharp correction in net asset values (NAVs).

“You should stay away from sector funds, unless you completely understand the risks. Even in that case, don’t allocate more than 5% of your portfolio to such investments,” advises Mr Pandit. A similar approach needs to be adopted for small and mid-cap funds as well. While there is no need to ignore them altogether, selecting a mid-cap fund calls for in-depth research and extreme caution.

STICK TO LIQUID FUNDS FOR SHORT-TERM INVESTMENTS

“If you are looking at safeguarding your funds in the short term, you should put your money in liquid plus funds and cash management funds. Fixed maturity plans (FMPs) can be considered too, but you need to thoroughly scrutinise the quality of bonds in its portfolio. Don’t take on excessive credit risk by opting for FMPs with exposure to real estate companies, stock broking firms and non-banking finance companies (NBFCs),” cautions Mr Pandit.

DON’T SWITCH FUNDS OFTEN

You need to make yourself immune to the numerous voices clamouring to attract your attention and offer hot tips on market/stock movement.

Market players expect sensex to go over 10KThis kind of noise pollution can be injurious to your portfolio’s health.

Hence, it is imperative to shut out the information overload and bank on your asset allocation to guide you out of the murky situation.

“If you switch funds often, you can end up shelling out a considerable sum in the form of entry and exit loads, which can dent your returns further. Unless you have a compelling reason, reshuffling your portfolio once in two years will be good enough,” says Swapnil Pawar, director, PARK Financial Advisors.

FOCUS ON GOALS, NOT MARKET MOVEMENTS

Finally, it pays to adhere to the most commonly doled out advice: Think long term. While ’07 fattened investors with saccharine-sweet returns, ’08 acted as the calorie-stripper. This is how the market has always behaved and it will continue in the same vein in future too.

Hence, your financial goals, and not the market trajectory, should dictate your investment decisions. “The phenomenon of markets falling and rising is common. So, don’t base your actions on market movements. There is nothing like a permanent rise or fall. Even in the past, the indices have lost 50% of their value and rebounded,” says Mr Mashruwala.

Over a period of time, a good fund is bound to deliver satisfactory returns, even if its value takes a beating in the short term.

Says Kartik Jhaveri, director of financial planning firm Transcend India: “Investing for the long term is the ideal approach to adopt. If your fund’s NAV is down, it’s unlikely to be down forever. You just need to be patient and wait for the storm to blow over.”

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