Investors should tread cautiously

Investors should tread cautiously
M Allirajan, TNN | Sep 23, 2011, 12.06AM IST

With the markets losing ground steadily, investors should buy equities at regular intervals. Safe havens such as fixed deposits and fixed maturity plans should be tapped only for the short-term. "People tend to be completely one-sided with asset allocation during such (turbulent) times," said Jayant Pai, vice president, Parag Parikh Financial Advisory Services. A one-sided approach, experts say, would spell trouble.

Take for instance gold as an asset class. Too many investors are chasing the metal because of economic uncertainty. The mad chase itself is pushing the prices up to record level, and a steep correction is imminent, said market watchers. "Investors should be cautious. They must not invest lump sum amounts in any asset class," says Anil Rego, CEO, Right Horizons, a wealth management firm.

In the case of bank FDs, investors should lock their money only for 3-6 months. "Choose short-term options and keep rolling them over. Don't lock your funds in three or five year instruments as equity markets would have turned for the better by that time," Pai said.

Fixed return products, such as non-convertible debentures issued by corporate houses, are more risky as in several cases they turn out to be mostly unsecured instruments. It is better to go for instruments issued by top-rated companies, said financial advisers.

While fixed maturity plans (FMPs) are attractive now, they would lose their sheen once the direct taxes code comes into effect, analysts said. Moreover, FMP returns, unlike bank FDs, are only indicative. The good old FDs may offer lower post-tax returns but offer an assured interest income besides ensuring safety of the principal amount.

Though investors would not lose money in debt mutual funds (MFs), they should also understand that products linked to NAV (net asset value) are not completely safe, say experts.

The biggest challenge is to make investors understand that they need to actually increase their overall exposure to equities during such turbulent market conditions, say advisers. "Investors should be buying more equity-related products as their proportion in the portfolio keeps coming down in a falling market," said Pai.

A systematic investment plan (SIP) in equity MFs spread over a year would work well, said Rego. Investors can also consider an SIP in income funds, he said. The bottom line is, don't go overboard on any asset class and follow the original asset allocation plan by making necessary adjustments.

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