Friday, October 7, 2011

9 tips to get your equity cards right :

It is extremely difficult to convince clients to put money in equity these days," says an investment consultant. "It seems most people have made up their mind to stay away from the stock market."

He would remain nameless because he fears more clients would talk about abandoning equity investments after reading his statement in the paper. Most financial advisors try to underplay the issue and insist that their clients are very much in the market. However, as you probe a little further, they concede that there is indeed a small problem. "Yes, newcomers to the market are reluctant to invest in stocks.

But people who have been in the market for the last five years and seen the market recover from the bottom, are more confident and continuing with their investments," says Ramalingam, founder and director of Chennaibased Holistic Investment Planners.

"The scene was drastically different in 2008 when the market hit the bottom. At that time, many people were not even ready to renew their systematic investment plans (SIPs). Thankfully, that is not the case this time." We are not talking about deserters in large numbers here. We are just discussing the tendency of most people to alter their investment plan according to the prevailing market conditions.

At this point of time, they see that the stock market looks extremely depressing and debt instruments are providing handsome returns. The broad market barometer, the BSE Sensex, is down about 18% in the past year, even as a simple fixed deposit has started offering 9%-plus returns. And the stock markets seem unlikely to recover any time soon because they are spooked every day with bad news, both on the global and domestic fronts. No wonder, many investors invest more in debt instruments such as fixed deposits (FDs) with banks and companies and debentures to earn higher, assured returns.

"It is only natural that people try to take advantage of the situation. FDs and debt mutual fund schemes are offering very good returns. So the pull is there. But, thankfully, not many people have stopped their SIPs," says Y Jawahar, head - distributions, Mata Securities.

"It is not very wise to take everything from the stock market and put it in debt at this juncture just because the stock market is not doing well. What happens if the market improves in the next three months? You can never predict the market," says Sajag Sanghvi, a certified financial planner. "In fact, I would say you should never put your entire money in equity even if the market was doing extremely well.

The same rule applies in the case of debt, too. Just because you are getting fabulous returns doesn't mean you should put everything in debt. That is why you should always have an allocation plan," he says.


You would come across the phrase 'stick to the plan' often these days. The plan may be called asset allocation plan or financial plan or investment plan, depending on the expertise of your advisor. But every expert worth his fee would insist that you should have a plan if you want to achieve your entire investment objectives.

 It can be a simple commonSursense approach like goal-specific investment done all by you. You may be, for example, putting money in a large-cap mutual fund scheme to fund your retirement.

Or you can approach a financial expert and seek help in putting together a strategy to meet your goals. The expert may take into account your income, expense and future goals and come up with a plan to help you meet your various life goals. He/she may use likely returns and inflation to reach realistic figures to achieve each goal.

The expert may also diversify your investment across various assets such as gold, silver, bond, equity, property and so on (yes, this process is called asset allocation plan) to make sure that your plan is not tied to the fortunes of a particular sector.

Well, to come back to the point, the whole idea behind investing (or allocating) a part of your corpus in equity is because you can hope to get superior returns from stocks in the long run. It also has tax advantage as returns from investments held for over a year are considered longterm capital gains and are not taxed. That is why many experts, including yours, advised equity to meet your long goals. Now what will happen if you pull out all your money from equity suddenly because you think the market won't go anywhere in the near future? Simple: you won't meet your investment goals.

"It is not a great idea to drastically alter your asset allocation plan. Of course, you can always tweak it a bit depending on the market or economic situation," says Sanghvi.


So, what should one do in the current market conditions? You should increase your equity allocation, says Ramalingam. Surprised? Don't be. This will happen automatically if you stick to your asset allocation plan. For example, if you have decided to allocate 40% of your investments to equity, you need to allocate more to equity when the market falls. This is because of the fall in value of your investment in equity.

"You should use a fall in the market to rebalance your asset allocation," says Ramalingam.

Now, wipe off that smirk off your face. No, you won't lose more money in the process. In fact, you would earn more return from your investment. It is simple logic. You have always heard about the secret behind maximum returns: buying when the market is lower and selling when it is high. Well, this is your chance to practice the theory.

In fact, this is one of the benefits of continuing with your equity SIPs when the market is down and out. "If you continue with your SIP, you will at least touch the bottom period a couple of months. If the market is down for a prolonged period, then you would be buying at bottom levels more. It will enhance your returns," says Sanghvi.

This doesn't mean that you can't alter your plan once it is finalised. You can always revisit it if you think the economic or market conditions have changed. But if you make any drastic changes in the plan, like pulling out money from equity and parking it in debt, then you better redo all your calculations.

This is a must as your debt investment would definitely yield lower than your equity investment over the longer term. So, put a realistic return figure and work out your future needs. Remember, you can offset the lower returns from your investment only by investing more money. This is a must to meet your goals
Source : ET

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