Investment strategies in current market to get good returns

Stock markets are gripped by fear and anxiety. Correction in broader markets started earlier this year in February – March, while the Nifty continued to chug along aided by surges in select heavyweights.

Rupee was on a decline from August this year due to tightening rates in the US and surge in oil prices. The markets took a further knock when one of our premier finance institutions defaulted on some of its debt obligation. This was a scathing attack on an already fragile market at a time of the year when liquidity runs dry due to advance tax payments and half yearly closing.

This led to some panic selling in credit markets by some mutual funds to create liquidity, spiking interest rates further and leading to losses across bond funds. Further, this led to sharp falls in smallcap, midcap and NBFC stocks. Some correction was warranted due to lofty valuations but there is some component of fear psychosis involved. The most important thing now is to understand as to where we can go from here and what needs to be done at the portfolio level.

We have always held that the only mitigation to such crisis is to have an airtight, well thought asset allocation in line with investment objectives and risk considerations. This should be expressed through an investment charter which helps to be disciplined and rational during such periods. During bull markets there is an illusion of calm and stability which may have pushed us to take more risk than we desire. Hence, this is a time to rethink your ability to take risk and reallocate at an opportune time. You may be in one of three situations and this is our advice:

Investors under allocated in equities: This is an opportunity to stagger your investments over the next 6-9 months and increase allocations in case of any large corrections.

Investors fully allocated as per their investment charter can remain invested. This is a temporary phase of volatility and will pass eventually. You may still want to revisit the risk in the portfolio and make changes if required.

Investors over allocated in equities and have not been able to bear this volatility, you must reduce it to your desired level of comfort on any surges.

We believe that for the currency markets to stabilise, oil needs to stabilise. This volatility does not change the fact that we are currently close to a $2.5 trillion economy and are poised to become a $5 trillion in the next 6-7 years leading to doubling of per capita income as well. Our macro indicators have deteriorated but are still not alarming or in any crisis mode. We have comfortable reserves and enough ammunition to counter the outflow of currency.

The next few months are likely to bring volatility due to election season and could bring valuations close long term averages or lower. Potential earnings' numbers, though slightly dented, look much better than the last few years. Historically, equity investments done during such periods have yielded good results and we have a table in the equity section to substantiate the same.

Meanwhile, the RBI held rates but moved its stance to tightening, which did not help the already nervous money markets. This led to a sell-off in bonds, currency and equity markets. Quality bonds are currently at elevated levels and a portfolio with 2-3 year maturity can yield between 8.25-8.75 percent.

We advise investments into open ended funds such as IDFC Banking & PSU, Axis Banking & PSU, and fixed maturity plans. The government has tried to isolate the IL&FS episode by acting swiftly so as to avert a contagion effect. SBI has calmed markets by offering liquidity to NBFCs through asset purchases. This should help bond markets stabilise. If currency depreciates further, it may warrant a rate hike by RBI. Hence, we recommend low maturity, high quality funds.

Asset allocation acts as the sturdy ship which withstands such storms, helping you stay invested during these periods. We will continue to engage and update you on developments and are happy to do reviews as and when required.

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