#5 Investment Tips During a Slowdown
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The BSE Sensex benchmark clocked the biggest single-day gain in over a decade on 20 September following the corporate tax cut announcement. This surge comes after three-month long downward movement in markets, which had left the investors jittery. Those investors who stopped their SIPs in panic or were sitting with cash waiting for a better opportunity to enter the market are the biggest losers in this rally.
More importantly, this episode brought home the fact that markets are dynamic and investors should not try to time it.
While this surge in market has brought cheers to investors, fears of a global recession still loom large. There’s no way to tell for how long the current market rally will continue and if the economy will now follow an upward growth trajectory after the corporate tax cut boost from the government.
If you are worried about how to protect your investment portfolio from a looming recession, stick to goal-based investment strategy. Here are five investment options to diversify into:
Gold has been historically seen as an asset that booms during a slowdown. Surge in gold price in the last 6-8 months is a testimony to this. Gold price has increased over 18.5% in the last 5 months from 1 April to 23 Sept, breaching Rs 40,000 in September first week.
Amit Kukreja, Founder, Amitkukreja.com, a financial planning firm, says that during fears of a global recession, investors panic due to the market volatility and park their money in gold. While gold is a good tool to diversify, buying physical gold, like coins, bars or ornaments, involve high making and wastage charges and maintenance cost. One should instead look at buying sovereign gold bonds or gold ETFs. “Sovereign gold bonds are the best way to invest in gold. They give an interest of 2.5%, capital gains are tax exempt and one doesn’t have to incur the cost of maintaining or storing gold. Gold ETFs too help in maintaining your allocation to gold but are less attractive compared to sovereign bonds,” says Kukreja.
You can easily allocate 10-15% of your portfolio in gold to hedge against market volatility during a slowdown.
Falling markets present a better opportunity to invest in equity funds as you stand to buy more units at lower price. Do not stop your SIPs when the markets are falling as the very purpose of SIPs is to ride out market volatility.
Stop your SIP only if the fund you are invested in has consistently underperformed in the last five or more years. Even then, switch to a better performing fund in the same category. “This is not a good time to churn your investments. If the investor has to switch from his current mutual fund, he should do so within the same category and not across categories,” says Surya Bhatia, principal consultant, Asset Managers.
It is a good time to start investing in mid- and small-cap segments as they are available at discounted rates. However, mid- and small caps come with bigger risk compared to large-caps and should only be picked if you have an investing horizon of over seven years.
Debt and hybrid funds
Debt and hybrid funds are ideal for those investors who cannot stomach the ups and downs in the market.
Even though investors’ confidence in debt funds is completely shaken up due to several instances of credit defaults by debt funds in the past of one year, Altico Capital being the latest, experts still see value in them. “If you chose a AAA rated scheme with a consistent performance of last five to eight years, debt funds are still a good bet for conservative investors,” says Kukreja.
Those investors who want exposure to both equity and debt can go for dynamic asset allocation funds. These funds also take care of asset allocation as equity and debt allocation in these funds keeps changing as per the market conditions. These funds are less volatile as the fund managers keep changing composition.
Those days are long past when real estate would yield 20-30% in a span of 3-4 years.
Property prices have largely stagnated across major cities. According to Anarock Property Consultants, housing prices increased by a meager 7 per cent in seven major cities during the last five years. The trend is expected to continue over the next few years because of the fall in consumption due to the slowdown.
So, investors should steer clear of investing in real estate. In fact, if you have held on to a dud property investment for long hoping for its value to rebound, take a one-time hit and exit.
However, for someone looking to buy a house, this is a good time to buy as the prices are bottomed-out. But, avoid an under-construction property. “Only buy a property which is about to get completion certificate or has already received it. Don’t take a chance with an under-construction property even if it’s a reputed builder as you would be locking your money with the builder and not in the property,” says Kukreja.
Retail investors who dabble in stocks should stick to core sector stocks in this shaken economy. Stocks in healthcare, utilities and consumer goods sectors are likely to give steady returns as people will continue to spend on medical care, utilities and food even if a recession hits.
Experts caution that stock investing should purely be based on investor’s competence of selecting a stock and maintaining their stock portfolio. If you lack the market expertise, you should invest through the mutual fund route. If you still want to invest directly in the market, consult a professional advisor so that you don’t end up losing money.