The global cues have produced a slippery ground for the Indian equity market. The movement of the S&P BSE Sensex has been range bound on a year-to-date basis. Disappointing corporate earnings for the last couple of quarters have weighed in on the market, while the electorates yet continue to exude confidence on Mod-led-NDA Government. The forecast of sub-normal monsoon by the Indian Meteorological Department (IMD) this year is also weighing on the market, with an implication of possibility that Reserve Bank of India (RBI) may not cut rates in its 2nd bi-monthly monetary policy statement for 2015-16.

Equity market trending downwards

Data as on May 26, 2015
(Source: ACE MF, PersonalFN Research)

However, at present all eyes are on the economic situation in Greece and the Federal Reserve in the U.S.

The Greek debt situation...
A warning by Greece that it could default on its next tranche of payment (worth U.S. $1.7 billion) in June to the International Monetary Fund (IMF) has sparked concerns.

Greek Government ruled out restricting access to bank accounts and free money if there is no break through with bailout creditors. An estimated € 30 billion has already flushed out of Greek banks since elections late last year; but a more sudden surge in withdrawals could cause banks to collapse. To prevent a bank run, Greece would eventually have to impose capital controls to preclude a collapse of its banking system.

It is noteworthy that Greece has survived for the last 5 years on rescue loans from IMF and its European partners. But now if the economy fails to make payment to IMF, or any other creditor, or being unable to fully pay pensions or public sector salaries; it could spell panic. The market panic could render Greek bonds and treasuries worthless, which coupled with a failing banking system, could lead Greece to eventually drop the Euro for a new severely devalued currency. Such an event would spook investor sentiments in capital markets across the globe causing Foreign Institutional Investors (FIIs) to pull out money from Indian markets.

Signs of economic vigour in the U.S....
The recently released reports shows robust increase in U.S. business spending in April, house prices extending gains in March, unemployment rate dropping and consumer confidence perking. Ms Janet Yellen, the Chairperson of the Federal Reserve in the U.S. has said that the central bank could raise interest rates this year if the economy keeps improving as expected.

Expectations are that the Federal Reserve will hike interest rates later this year. And if that happens, FIIs could pull out money from emerging markets and deploy it in the U.S.. The dollar has already seen a significant rally against other foreign currencies this year and the Indian rupee has faced significant pressure.

What should investors do?

PersonalFN is of the view that as long as real interest rates in the U.S. remain low, asset preferences of global institutional investors is unlikely to change. In other words, this means, they would look at India as an attractive investment destination (along with the other economies on their investment radar).

But going gung-ho and investing all your money could turn to be imprudent as the margin of safety seems to have narrowed down. Nonetheless, if your risk appetite permits and if your asset allocation calls for you to invest in equities, staggering your investment would be a prudent approach while taking exposure to equity. You shouldn't buy aggressively, rather buy selectively. Thoughtlessly investing or speculating can be hazardous to your wealth and health.

PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years. Also PersonalFN believes that your investment discipline and asset allocation would decide your success in investing.

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