Inflation is above 11%. Interest rates are rising. Individuals with home loans are struggling to cope with the higher equated monthly instalments (EMIs) and simultaneously deal with inflation.
In the stock market, the bulls are constrained by concerns over the macroeconomic scenario domestically, the grim global scenario, persistent foreign institutional Investor (FII) outflows and the possibility of another round of monetary tightening. That does not mean the bears have a free hand. The correction in commodities, especially crude, provides ample ammunition for the bulls to conduct a short-term rally.
Investors who flocked to gold as the “safe asset” were disappointed at the way the price dropped in August. Real estate rates, too, have dropped and by all indications will continue to fall. No asset seems to be a safe haven anymore.
The only asset that beckons is debt, with interest rates rising. But would it make sense for an investor to move into debt? While this is a good time to reassess one’s portfolio, it would not be wise to simply rush to income funds, fixed maturity plans (FMPs) or fixed deposits.
Read on to figure out how to make the best of such a bleak market environment.
Don’t let market conditions determine your asset allocation
For most investors, it is often the bull or bear run that determines their preference for a particular asset. During a bull run, everybody flocks to equities, and when the market crashes, uncertainty and fear paralyse everybody. This is ironical
since the risk of losing money at 11,000 is much less than when the Sensex is at 20,000. In 2002, when the Sensex was around 3,200 levels, inflows into equity mutual funds were Rs4,517 crore. In 2007, when the Sensex was in the range of 14,000 to 20,000, inflows into equity mutual funds totalled Rs1.07 trillion. *Investors were far more willing to buy equities at higher rather than lower prices.
Right now, when stocks are getting whipsawed and interest rates appear seductive, the instinctive reaction is to run to a safer haven. But abandoning equities now and moving to debt and cash would be a mistake. Those who under-invest in stocks would be left flat-footed once the market recovers. And equities, as an asset, must have a place in your portfolio. This, irrespective of the state of the market. In fact, if your equity holdings have been beaten down substantially, you could make some refinements to your portfolio. Check to see by how much your portfolio has deviated from your predetermined allocation. If your equity allocation has fallen substantially, you should focus on increasing it. Stay focused on your strategy. Not on the market.
Now is a good time to consider equity