Where to invest? That's the question that continues to be on top of the mind for smart investors in these uncertain times. Why uncertain times when everything looks to be all so investor friendly  rising equity markets, stable debt markets? That's because those who timed the market well are now itching to book profits. And alternative avenues for investment are not apparent.

For a lay investor, things have not been better for a very long time. After having lost a chunk of his net worth in the stock markets in the post March 2000 bear market, sentiment, for him, is once again bullish. This lay investor, given his past experience, did not believe that the rally was for good till the Sensex actually beat the 3,500 mark (or, as some lay investors would tell you, the markets moved too fast for them to capitalise upon).

In the interim period (March 2000 and January 2003) the lay investor probably invested most of his money in Relief Bonds or Post Office Savings Schemes (or some other government savings scheme), which will return him between 9.0% and 11.0% pa (atleast my money is safe). But now the returns are much lower (6.5% to 8.0%) and the incentive to invest in such schemes is minimal. He now has an investment option  the stock markets (the good times are only beginning). So for him there is hardly any dilemma.

The smart investor on the other hand has taken a completely different route. He did take a hit when the markets crashed. But he went on to correct his mistake (over leveraged on equities) and invested in debt mutual funds. These schemes yielded him about 15% pa over this period. Having made substantial gains, and to avoid making the same mistake of overleveraging (this time in debt) the smart investor booked a part of his gains (probably post the correction in January 2003) and ventured into balanced and diversified equity funds. Six months later, equity funds have returned him about 25% (annualised return in excess of 50%).

Leading Diversified Equity Funds

OPEN-ENDED, GROWTH SCHEMES	NAV (Rs)	6-MONTH
FRANKLIN PRIMA FUND G	44.1	52.1%
RELIANCE VISION G	36.2	36.8%
HDFC TOP 200 G	23.6	36.6%
HDFC EQUITY G	30.5	35.1%
SUNDARAM SELECT MIDCAP	13.8	34.8%
HSBC EQUITY GR	13.6	32.7%
IL&FS GR&VAL G	15.5	32.7%
TATA PURE EQ	12.8	32.5%
RELIANCE GR G	40.4	32.4%
DSP ML EQUITY	16.9	29.9%

NAVs as on 7th July 2003

But now the smart investor is facing a dilemma. He knows debt funds are unlikely to return over 7% pa unless some structural changes (further cut in returns offered by PPF etc) were to take place. This is unlikely given that elections are around the corner. The stock markets on the other hand have rallied by over 700 points (about 25%) in the last 6 months and it is unlikely that they will continue to move in a unilateral northward direction. So where does he invest his money (part of which he probably has acquired by booking profits in equity funds!)?

The choice of investments is indeed limited. But this situation has arisen not because the long-term fundamentals have altered, but because in the near term things are uncertain. One way to over come this uncertainty is to ensure that the noise does not lead you astray from the financial plan that you may have devised for yourself. And that is the advice we would like to leave you with.

In a euphoric environment there is a chance that greed will lead you astray from your financial plan. As per your risk profile you may have invested, say 20% of your assets in equity funds. However, since over the last six months your equity investments have grown faster than your other investments, this number has probably grown to 25% or maybe even 30% in case you were invested in aggressive equity funds. And given the euphoria prevailing in the market, you probably are contemplating investing some more money in equities! By the time you have executed your decision, your investments would no longer conform to the financial plan. And it is such misadventures, which inflict the maximum damage in case the markets were to turn for the worse

Reviewing your investment portfolio to see whether or not it is in line with your financial plan is a very important task that you must undertake at regular intervals. If possible, you should take advice from professionals so that you can benefit from their expertise.

If after reviewing you find that your portfolio is not in line with you plan, then take corrective action. Do not wait. Gradually realign yourself with your plan. And if you decide to rework your plan, rather than your investments, then make sure you are aware of the change in the riskiness of your portfolio, which may or may not suit your profile.

 

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