Sunday, September 26, 2010

It's still the right time to invest in Mutual Funds:

TEXT: Nimesh Shah, MD & CEO, ICICI Prudential AMC:

 The market has hit 20k once again, the first time since January 2008. Those who missed the bus this time can still invest in mutual funds and book some profits.

The question in the minds of most investors today is: Is this the right time to invest in mutual funds? And my answer to them is a resounding “Yes”.

The answer is simple and there are many reasons to it. It is always the right time to invest as long as you know why you are investing, what you wish to achieve with each of your investments in definite terms and based on that do you have the right investment strategy.

Mutual funds help you allocate your investments across stock markets, bonds, commodities like gold and also real estate. In a way that provides you with an optimal combination of liquidity, safety and returns. Think hard—what does one expect from any investment that one makes? Anything and everything you can think of will be a manifestation of either your need for liquidity, safety or for higher post tax returns.

Mutual funds are just a vehicle, what ultimately works to take you to your goals is disciplined asset allocation among all these assets, diversification within an asset class and a regular contribution to your kitty. Mutual funds are not some proxy for investing in the stock market, they are much more than that—a vehicle to carry you to your financial goals.

Investors commit the folly of linking mutual fund investments to only equity and thereby speculate on timing. There are times when debt does well and equity languishes and vice versa. Mutual funds make it possible for investors to simultaneously participate in all these asset classes thus mitigating risk and generating risk adjusted returns. Let us divide mutual funds into two broad categories—debt mutual funds and equity mutual funds. Now, your immediate question could be “is this the right time to invest in equity?” This question can hold true for a trader whose primary objective is to make money over a very short time.

However, for an investor who is planning for long-term goals, this question holds very little value. For mutual fund investors the key driver should be wealth creation. Regular investment in mutual funds needs to be a habit and not an option.

In case of equity investments, it is important to remember that it is all about partnering with the entrepreneur in his/her business. Every business has a gestation period and it also goes through highs and lows. However, a good business with sound principles will eventually create wealth. Thus, the right idea is not to speculate on unpredictable market levels but to evaluate the business, look for right management and focus on investing for over a period of time.

History shows that investors who have held on to blue-chip companies for longer periods of time have created much more wealth and in greater multiples than investors who would have traded in those stocks for shorter periods of time.

It is not possible for everyone to be a successful entrepreneur—not because we are not capable but also due to circumstances and opportunities. The next best option to create wealth is to partner a successful entrepreneur in his business. At least for salaried individuals who wish to give their money some scope to multiply into wealth, there is no option but to invest into equity.

Despite the market being at the level it is currently, investment opportunities continue to exist. For instance new investors could look at investing in funds that bet on infrastructure growth. Despite the rise in the market, investment demand and infrastructure driven sectors continue to trade at relatively reasonable valuations.

A large part of the rally has been led by consumption driven sectors and consumption driven growth in India’s GDP in the last few years. Infrastructure theme has so far not participated in the market rally thereby being well positioned for possible future outperformance riding on increased focus from the government of India. Further, investors can increase the allocation to equity at every correction.

Mutual funds also provide the option for investment in the bond market. Investing in debt mutual funds will help investors in efficient asset allocation and mitigating portfolio risks. Debt mutual funds are managed on the premise of safety, liquidity and returns, thereby adding value to an investor’s portfolio.

There are many diverse products that investors can choose from on the debt side based on the prevailing interest rate cycle.

For instance, in the current interest rate scenario where short-term interest rates prevail at multi-year highs, investors can invest in three-months to one-year fixed maturity or interval plans. Investors can also look at investing in income funds and gilt funds over the next three months as the benchmark 10-year government security yield is hovering around 8% plus with time horizon till April-May 2012.

The other aspect that retail investors need to consider while timing investments is liquidity. How many retail investors had sufficient liquidity and were able to capitalise on the market correction in 2008?

Mutual funds step in such a scenario as they require lower investment amounts against other asset classes, thereby making participation in this asset class more affordable for retail investors. Investment tools like systematic investment plans (SIPs) provide investors with the opportunity to include mutual funds as part of their monthly investment plan. Also, timing matters less in SIP investing due to the advantage of investing across market levels and by removing emotions out of investing.

In today’s world, financial security is very important. We work 24X7, 365 days a year to earn our income. But having earned that income do we make it work hard and transform into wealth? One has to devote a little time, identify a reliable financial adviser and make the money work a little harder to provide for much-needed financial security. We need to work towards converting savings to investments.

While investing hard earned money there is also the consistent thought on how prudently and reliably it will be worked upon. Mutual funds have filled the enormous gap between a savings account and investing in the stock market through different types of funds. Mutual funds offer investors the primary advantage of expert fund management equipped with the resources required to constantly monitor global and domestic investment triggers and take prudent investment calls.

To conclude, trying to time investments is a crucial act which can also lead to opportunity loss. Timing the market well would have meant investing after the 9/11 World Trade Center crisis or after the Lehman Collapse in 2008. How many succeeded in doing so? We all buy shirts, trousers, dresses and shoes in a deep discount sale but never equity! A mature investor takes a long-term view, invests regularly and refrains from speculation fully knowing that market direction cannot be predicted. Wealth creation is an evolutionary and gradual process where “discipline” matters, not “timing”. 


No comments:

Popular Posts