After regular interactions with existing and prospective clients i had observed that many of are in a dilemma as to where to invest the incremental money, which is getting matured from Fd’s and other sources like professional income, etc.

The reason being in the current environment the traditional investments are offering low rates of interest and where equity market is moving in a straight line since couple of months and past returns are showing healthy trend.

In general, the history shows that the majority of people would like to invest in an asset class whose past returns look attractive in anticipation of repeat of the same in near future.

However, as mentioned in my previous mails, the investment objective should not be dictated by the market movements or attractiveness and past returns of particular asset class, rather it should be based on your needs, requirements, while keeping in mind the pre-determined asset allocation. 

                     INVESTMENT OPTIONS IN THE CURRENT MARKETS

In order take a prudent decision with your investments i appended below information.

For short term requirement of 3-6 months: Then invest in liquid funds( to get better returns than savings accounts)

Looking to invest for a year: Then invest in Arbitrage Funds. It has potential to give tax free returns in the range of 6-7% per annum.

For amount maturing from FD’s etc, consider investing in debt funds or hybrid funds with a 3-5 year horizon to earn better than FD’s.

For First Time Investors: After seeing the past returns from the market many of the new investors would like to invest in equity expecting the same past returns. For such investors equity is long term asset class. It would be prudent to invest based on one’s goals and responsibilities by doing proper asset allocation. Examples like planning for Retirement, Children’s education etc. That too invest in a funds focussing majorily on largecaps like multicap funds.

For Existing Investors:

For most of you regular SIP”s are running and having existing equity exposure through mutual funds, stocks and Insurance policies. For such investors, the  incremental investments should be made in hybrid funds like Equity savings Funds, Debt funds, etc.

The reason being we are in a mid cycle of the rally, where in early gains are made factoring the low interest rate environment, stable macros, reforms etc.

More than earning high returns, losing less is extremely important for good long term results.

For those who depend on FD interest income:  consider SWP(systematic Withdrawal Plan) Option in Debt funds- to meet cash flow requirements in a tax efficient manner,Apart from monthly dividend option in Arbitrage funds.

The main driver of equity market returns are earnings. Which are not yet visible due to various disruptions in the recent past like Demonitisation &GST roll out. But the stock prices moved ahead due to flush of liquidity.

There are no rules which market has to obey. It can run ahead or fall behind earnings. But long term growth is always equal to earnings growth. In the long term returns from the markets more or less equal to nominal growth of the economy. 

Since 1991 the Indian economy has grown 10 times and the sensex has multiplied 32 times. As our GDP grows from the present $2 trillion to $5-7 trillion in the next 10 years phenomenal wealth will be created by Indian businesses. Hence disciplined systematic investment, undeterred by volatility and adhering to asset allocation should be the ideal strategy to participate in this potential wealth creation journey.

Do let me know in case of any further queries.

“Over short time increment, one observes the variability of the portfolio, not the returns.”- Nassim Taleb