When the equity markets rise, we go overboard on stocks, when gold is in the news we end up hoarding the yellow metal, when debt products are aggressively advertised, we turn into debt investors.
"Retail investors tend to panic when an asset class turns volatile, and immediately jump or go into another asset class," says Anshu Kapoor, head, global wealth management, Edelweiss Capital.
For instance, small investors ended up buying gold in the past couple of years based on the fabulous returns that the metal delivered in the past five years. After correction set in in April earlier this year, investors latched on to debt funds.
At that point of time, after two rate cuts, long-term debt funds were showing returns of 12-15% for a one-year period, enough to catch investors' fancy. When the government raised diesel prices and announced a series of reforms, many felt the government was serious about business and became optimistic about growth coming back on track.
Many latched on to equities, taking the Sensex above the 20,000 mark, close to its all-time high. "They make the mistake of chasing the best-performing asset class on the basis of historical data, and end up parking their money in that asset class," says Jyotheesh Kumar, senior vice-president, HDFC Securities.
However, the recent fall in the rupee that has taken it close to 60 against the dollar has taught a hard lesson to investors. "A fall in the rupee will lead to higher prices of imported commodities and increase our current account deficit," says Mahendra Kumar Jajoo, executive director and chief investment officer, Pramerica Mutual Fund. This could further slow down growth. Stocks have been badly hit and the Sensex plunged to 526 points on Thursday. Bond market investors expecting more rate cuts are now a worried lot.
"With the rupee strengthening, the central bank will pause, and rate cuts will be delayed," says Arvind Chari, head of fixed income, Quantum Mutual Fund. Bond yields have hardened, with the benchmark 10-year 7.16% 2023, moving up from 7.10% to 7.40% which, in turn, has hit debt market investors.
For every hardening of interest rates by one basis point, a 10-year bond could see its price fall by 5 paisa. Hence, debt investors who are fully into gilt funds could see mark-to-market losses in their portfolio in the near term.
"In choppy markets like this, diversify and do not go overboard. Stick to your asset allocation," says Vishal Dhawan, Chief Financial Planner, Plan Ahead Wealth Advisors.
So, if you started with Rs 100, in January 2011 with an asset allocation of 60% to equities, 30% to debt and 10% to gold, the value of Rs 100 invested would be Rs 104.46. However, if you changed the allocation midway in December 2011 to 70% equities and 30% into gold and 0% in debt since gold was giving high returns, the value of Rs 100 invested by you will be a mere Rs 101.85. Clearly, you have incurred transaction cost, short-term capital gains tax and yet lost about 3% in the process.
"Different asset classes can move in different directions, depending on a host of domestic as well as international factors, which are difficult for an investor to predict. Hence, it makes sense to follow an asset-allocation approach to investing," says AV Srikanth, CEO, Motilal Oswal Wealth Management.
Also, remember to periodically review your portfolio. "Review your asset allocation periodically. In case it has strayed away more than 5% from the original recommended for you, rebalance your portfolio and bring it back to the original allocation," says Vishal Dhawan.
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