2011 is history! It was not a good year for
investors—both domestic and foreign. Nifty lost 21% during the calendar year.
The general consensus is that the market is likely to remain lackluster in near
to medium term. A sense of despondency has enveloped the equity investors.
However, this does not mean that you should stay
away from the market. You may not know when the market may stage a turnaround.
Many investors—including the savvy institutional investors—were caught off
guard in 2009 when the markets posted handsome gains (close to 90% returns)
after tanking in 2008. History has proved it time and again that serious money
can be made only by serious and focused investors—never by traders! Making
money or more aptly creating wealth is a serious and boring business.
However, you should tread cautiously to get the
most out of this market. Here are some pit falls that you may avoid in 2012.
Don’t buy a stock or a fund because it is
cheap
Majority of stocks and funds have borne the brunt
of the downfall throughout 2011. For example infrastructure stocks and funds
have seen serious erosion in their valuations. However, this does not mean that
you should go and buy all of them. You need to do some serious research if you
are investing in stocks, or rely on the expertise of a fund manager-- if you
access equity market through the mutual fund route-- if he has a proven track
record. If you do not have the risk appetite than you should confine yourself
to a regular diversified fund rather then sector specific funds. While the
latter can give you above average returns in bullish times; they can fall
sharply in bearish times also. They tend to be highly volatile on either side.
Not more that 5-15% of your corpus should be invested in such sector specific
stocks/funds provided you have conviction in the sector over long term.
Don’t Panic
Do not press the panic button and sell off your
holdings should the markets decline further even from current levels. Markets
take their own time to turnaround. Agreed that things are bad on the economic
front, but Indian economy is still far away from being written off. Remember,
the night is the darkest just before dawn. Just as markets usually do not
factor bad news in bullish times, so too it ignores good news in bad times.
Consider the following:-
· Doomsayers may point out that Indian economy may be
growing at a lesser pace (from 9% growth rate in recent past to 7%-7.50% presently)
and hence investments in equity market should be deferred. The rate of growth
may be slow-- albeit it is growing! Mind you 7--7.5% is still a very decent
growth rate from a global perspective.
· According to business publications, manufacturing
activity in India
· Auto companies have shown robust growth in numbers
for December 2011.Overall car industry grew 9% in December compared to a 7%
growth in November this year. And that too in a high interest environment.
· Corporates have shown a growth trajectory in
profits even if it is lower as compared to earlier years.
· RBI has indicated that it will focus more on growth
rather than inflation. It has also re-iterated that it may not go in for any
more rate hikes—rather it may look at reducing rates if inflation starts to
moderate.
Discard trader mentality
One common mistake that investors make is that once
they buy a stock/fund, they expect it to go only in one direction—up. Markets
do not move as per our wishes. Remember, it is not your thinking that makes big
money, it is sitting. Investors, who had sold out in panic during the 2008
fall, are still licking their wounds. However, those who had bought into the
panic laughed their way to their banks. Differentiate between long term
investing and short term trading. Rs. 1 lac cannot become Rs. 50 lacs through
trading! Long term investing is the only route which can multiply your
investments, maano ya na maano!
Don’t stop your SIPs
SIPs are usually the first victims during any
market downturns. Investors more often than not discontinue their SIPs while
holding on to their stocks (even if is a losing proposition). SIPs are an
excellent way to accumulate units at low prices and in the process lower your
average holding cost. It has the power to evolve as a second earning member of
your family—even when you stop earning! While lump sump investments have an
element of timing involved, SIP eliminates the risk of market timing. One
common query that we face during out interaction with our investors—current and
prospective alike—are: - My SIP has completed 1 year. Should I stop now, since
market is not looking good? There may be a period of under performance in say a
fund or stocks. That does not mean that you discard them. Consider the
following returns matrix showing returns of a broad category of mutual funds
for the period 01/01/2008—30/12/2011.The Nifty during this period gave a
negative return of (-) 7% CAGR approx during the same period.
|
Mutual
Fund Scheme
|
SIP
returns
(CAGR)
|
Non–SIP
returns (CAGR)
|
|
BSL Top 100
Fund
|
3.00%
|
(-) 4.90%
|
|
DSP BR Top 100
Equity Fund
|
3.96%
|
(-) 2.63%
|
|
Franklin India
Blue Chip Fund
|
7.17%
|
(-) 0.94%
|
|
HDFC Top 200
Fund
|
5.69%
|
0.09%
|
|
HDFC Equity
Fund
|
6.85%
|
(-) 0.66%
|
|
IDFC Premier
Equity Fund
|
11.81%
|
0.47%
|
|
ICICI Prudential
Discovery Fund
|
11.02%
|
0.22%
|
|
DSP BR Small
& Mid Cap Fund
|
7.29%
|
(-) 4.02%
|
|
Reliance Equity
Opportunities Fund
|
10.91%
|
(-) 1.55%
|
The above table proves that SIP is the vehicle not
only the right strategy
to beat bearish market, but also a right vehicle to create long term wealth
over long term. After all investments are done with a view to meet your life’s
long term goal, be it children education and/or marriage, your own retirement
etc. Another argument in favour of SIP is that since your income is monthly,
then why should your investments be lump sum or one time?
Get your asset allocation in place
One of the most basic principles of investing is
that you should not put all your eggs in one basket. No matter how bullish you
may be about a particular asset class. Even financial planners like us recommend
asset allocation to our clients and sticking with it. Prudence suggests that
you should diversify your investments across different asset classes viz;
equity, debt/fixed income, gold etc. A portfolio so diversified will not only be
less volatile but also maximizes your over all portfolio returns. Returns are
important, but so are your goals too, fulfillment of which depends upon your
judicious investment strategy. (Refer our earlier article on “Why investors
must look beyond returns of 04/2/2011—the same has been uploaded on our blog:- http://www.investwithaims.blogspot.com/2011/02/why-investors-must-look-beyond-returns.html).
Wish you a prosperous and safe 2012!!
