Time and time again, we’re reminded of a few rules that remain sacrosanct. Foremost among them – don’t succumb to fear when others are panicking and resist the urge to deviate from your plan when it seems everyone else is scrambling to catch the opportunity of a lifetime.
In an age when most financial decisions have moved to digital platforms, the tendency to react quickly to ongoing developments is high. Take for example the tumultuous start to the year for broader markets. The Nifty Midcap 150 and Small Cap 250 fell 6.6% and 11.5% in January respectively and then another 10.6% and 12.7% respectively in February. And given that most retail mutual fund portfolios are skewed towards the broader markets, most investors experienced large drawdowns.
In retrospect, one can look at these data points clinically. But try to remember the feeling of not wanting to glance at your portfolios at the end of February. If you felt that way, take heart, because you weren’t alone. These are scenarios that trigger fight or flight responses. The experience of seeing your hard-earned money being eroded on a daily basis is not easy to stomach. It leads to self-doubt and recrimination.
The context, of course, was elevated uncertainty globally. Geopolitical tensions have been high in several parts of the world – even here in India. The desire for safety after experiencing heavy losses led many investors to stop or pause their systematic investment plans or, worse yet, to sell their investments in equity. It’s easy to rationalise this. You could find yourself thinking, I’ll find a better opportunity when markets are doing better. Or, I can’t deal with any more loss.
Acting on those impulses can be problematic, though. What happened next was something right out of the textbooks. Broader markets made a roaring comeback. Since April 7 – the most recent lows – both the midcap and small cap indices have recovered over 20%. And those that waited on the sidelines missed out.
Incidentally, a lot of fund managers have failed to beat the benchmark in these two categories. Moreso in the small cap space, where data showed that only two schemes managed to perform better – that too, by less than 1.4 percentage points. Of course, this is too short a timeframe to draw any lasting conclusions, but increasingly – at least in the midcap category – the argument to use a passive investment strategy is gaining traction.
On an episode of Your Money Matters this week, I discussed this in quite a bit of detail.
The Search For Better Fixed Income Returns
As interest rates fall on deposits, a lot of investors are scouting for better investment options. And sometimes, the lure of better returns can lead to pitfalls. Take, for example, the peer to peer lending platforms that gained significant traction some time back. Peer-to-peer or P2P lending allows individuals to lend to other individuals – facilitated by a platform. For example, a borrower can apply for funding of Rs 50,000. And 50 individuals on the platform could lend Rs 1,000 each. On the face of it, it was a great option – both for the borrowers and the lenders.
Borrowers would often lack the ability to take loans from banks or other lending institutions because of low credit scores. And lenders – individuals willing to take the risk – would be rewarded with high interest rates. But misuse of these platforms forced the RBI to step in. And as a result of the most recent regulations released in August last year – most P2P platforms have had to shut shop. I discuss this here.
There are still quite a few options that will give you stable returns – better than fixed deposits but not as risky as peer-to-peer lending. Among them are arbitrage funds, income plus arbitrage funds and even hybrid funds, which give you a mix of debt and equity. Financial planners advise against opting for low-rated corporate bonds and other investments where your principal is at risk. After all, fixed income should ideally protect your capital.
Speaking of other options, several asset management companies have applied to set up Specialised Investment Funds. This is the new investment option that the market regulator Securities and Exchange Board of India introduced not too long back. Investors will have to commit at least Rs 10 lakh to gain access. It’s a nascent space, that could offer investors strategies they don’t have access to with mutual funds. I spoke about this with Radhika Gupta, chief executive officer of Edelweiss AMC on Money Wise this week. Her company has incorporated a SIF, but even she feels that investors should still put 70% of their investments in tried and tested vehicles, like mutual funds.
It’s the end of a good week for equity markets, and your portfolios are likely looking much healthier than they did at the start of the year. It’s a good time to review your strategy. Next week, on Money Wise, I’ll be speaking about the bucket strategy of portfolio construction.
Until next week, happy reading!
Alex
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