5 min read.Updated: 10 Dec 2020, 05:07 PM ISTRenu Yadav
Define your financial goals clearly, set out an asset allocation plan in line with the same and invest accordingly
Consider rebalancing the portfolio periodically to maintain the targeted asset allocation
The current market rally has taken many by surprise. Recovering post-covid-crash losses, the broad equity market indicator, S&P BSE Sensex, has delivered a huge return of 72% since the bottom it touched on 23 March 2020. Some of the investors, especially those who pulled out of equity investments during the market crash and those who remained underweight in equities thinking the rally wouldn’t last long, are being driven into investments as a result of the fear of missing out (FOMO) syndrome.
“In general we are witnessing some investors getting a FOMO feeling as the markets have rallied in a short span of time," said Saurabh Bansal, founder, Finatwork Investment Advisor, a Sebi-registered investment advisory firm. Some of them are rushing to invest in equities now. “A young investor working in an MNC firm wanted to increase his equity allocation from 35% to 60% (he brought it down to 35% from 50% post the market crash in March) after seeing the dramatic recovery in equities over the past six months, which was even more pronounced during the last six-eight weeks. He seems regretful for missing out on this rally and wants to catch further upside potential," said Santosh Joseph, founder and managing partner, Germinate Wealth Solutions LLP, a mutual fund distribution firm.
While no one can guess how long the rally will last, FOMO should never drive you to go heavy on any asset. Apart from the Indian equity market, even US equities and debt mutual funds in India have done well in the recent past. We tell you what experts are saying about investing in them.
The sharp recovery in Indian equities is driven by the hope that disruption caused to economic activities by covid-19 is likely to normalize soon. However, experts are advising caution as valuations have shot up.
“Markets tend to run on expectations rather than on actual historical data. The market rose sharply following positive global cues, including reports of development of effective covid-19 vaccines and upbeat economic data from the US and China. The weighted average price/fair value of Nifty companies is now at one of the highest levels for available history. In India, GDP for Q2FY21 contracted by 7.5%. This along with high-frequency indicators like PMI, GST collection, better earnings and financial conditions raises hopes for a quicker-than-expected recovery. But from a valuation perspective, markets look expensive," said Sameer Kaul, managing director and chief executive officer, TrustPlutus Wealth Managers (India), a Sebi-registered investment advisory firm.
For the rally in equity markets to sustain for long, it has to be accompanied by earnings growth. Currently, it is driven by the liquidity from the economic stimulus announced by various governments, said experts. So, they are advising investors to remain cautious. “Investors should be cautious and invest in equities in a staggered manner," said Kaul.
Some international markets, including the US market, outperformed most of the emerging markets in the past year. Motilal Oswal Nasdaq 100 FOF, a fund that invests in Nasdaq ETF has delivered a return of 56% over the past one year compared to 8% from Sensex over the same period. The performance of the fund has been supported by depreciation in rupee as well as the better performance of US technology stocks in which NASDAQ index is heavy.
Experts believe geographical diversification is critical but one should not go overboard on one equity market and be mindful of valuations. “US markets should form a part of a global portfolio, though they are also expensive. Investors should look at a combination of products that invest in global developed markets as well as emerging markets like China, to get the benefits of different growth levers in different parts of the world," said Vishal Dhawan, founder of Plan Ahead Wealth Advisors, a Sebi-registered investment advisory firm.
Shyam Sekhar, chief ideator and founder, iThought, a Sebi-registered investment advisory firm, agreed. “We believe that rushing to invest lump sums in the US markets is ill-advised. There was merit in investing in March and we recommended the Nasdaq 100 ETF then. Now, we advise clients to stagger their global investments through long-term systematic investment plans or systematic transfer plans. We do advise a gradual spreading of clients’ global investments into more emerging markets," he said.
Debt mutual funds
Interest rates are at multi-year lows, impacting investors in traditional products such as bank fixed deposits. However, debt funds have benefited from falling interest rates. A majority of debt funds investing in medium to high maturity papers have delivered a return of at least 8-9% over the past one year. “We are getting queries from some investors about which debt fund to choose as an alternative to bank FD," said Renu Maheshwari, CEO and principal advisor at Finzscholarz Wealth Managers LLP, a Sebi-registered investment adviser.
However, investors should remember that it will be difficult for debt funds to replicate similar performance as there may not be similar rate cuts going forward. Debt funds still merit investments given the tax advantage they have over bank FDs. The tax liability on debt funds is lower as the gains for investments after three years are taxed at 20% after indexation, while FDs are taxed at slab rates.
Experts believe that investors should be mindful of the risk and choose debt funds that are in line with their investment tenure. “Returns going forward on debt are likely to be much lower as the interest rates may be close to bottoming out. Expect returns close to the yield to maturities of debt funds less expenses. Look carefully at credit quality and buy credit risk funds only if they are comfortable with it, as the credit cycle is still weak. Avoid chasing yields and look at portfolio composition," said Dhawan.
Investment decisions shouldn’t be made in haste. “There should be planned asset allocation to achieve the desired goals. Discipline is needed both at the time of market rally as well as crash." said Maheshwari. Define your goals clearly, set out an asset allocation plan in line with the same and continue investing irrespective of market movement. However, rebalance the portfolio periodically to maintain the targeted asset allocation.