You are utterly confused. Between April and June this year, many hurriedly scurried out of equities. And the stock indices bounced back with a vengeance in July. Now, there is frustration and desperation about the lost opportunities, as people wait for stock prices to correct so that they can re-enter. To seek safe havens, some of us got into cash, debt, and gold. Sadly, in these cases too, the events unexpectedly turned against us. The situation baffled us.
Armed with cash, the hapless investors decided to ‘time the market’, and act on their own – largely as day traders. They realised, like many did in the past, that it is almost impossible to do so. Even the experts are unable to predict the random walks of the stock market. While debt seemed secure, there was uncertainty about future returns as interest rates fell, and inflation inched up. Gold seemed a no-brainer but was this a good time to buy at such high prices?
Most investors are shocked and stunned. To be safe or take risks, that is the question today. What should one do over the next 3-6 months? Is it better to take the plunge into equities, and ride out the topsy-turvy waves and volatility in the market? Is it more pertinent to accept lower returns, but protect our investments, and shift to debt? Is bullion the new calling for most of us? As some experts contend, if there’s one advice they wish to give, it is to be in gold.
In this cover story, Outlook Money takes a 360-degree look at short-term strategies to shield your wealth from tumultuous upheavals, and simultaneously safeguard your returns. We present the pros and cons related to each asset category to enable you to make informed and insightful decisions. Beware that there is no one shoe-size that will fit every feet. At the end of the day, we are on our own, and we will need to carefully re-construct our plans on an individual basis.
We consider ourselves to be rational human beings. But even the smartest of us tend to panic. Worse, we later defend our dim-witted decisions as logical and sensible. Given the information we had at that time, we theorise, what we did was the best we could. There were few choices, and we had to act in real time. Any delays from our side could only worsen the situation. Moreover, we couldn’t sit back, and watch our wealth being eroded, minute-by-minute, day-by-day.
Nothing epitomised this panicked-rationality better than the mayhem in the mutual funds market. As the Indian stock indices tumbled by almost 40 per cent by March 23 this year, the crazed investors ran away in herds. In June, they pulled out a massive `13,500 crore from the equity-oriented schemes, an increase of more than 75 per cent compared to the previous month. The overall monthly inflows in such funds in June were the lowest in the past four years.
Massive outgoes were witnessed in the multi-cap equity funds, followed by the large-cap ones. A similar trend gripped the hybrid funds, which invest in a mix of equity and debt; arbitrage funds proved to be an exception. The mid-cap category survived the bedlam, but monthly inflows fell to `36.70 crore in June. Ironically, as the markets recovered, the assets-under-management of the equity funds grew by 8 per cent between May and June this year.
Three reasons explain this apathy towards equities. The first, feels Arun Kumar, Head of Research, FundsIndia.com, is that people need clarity on future cash-flows, i.e. their incomes, before they can decide to re-enter the market. He adds that they were surprised by the sharp rally, and wish to wait for prices to come down to lower levels. “Investors are focussed on earnings beyond FY21,” says Swarup Mohanty, CEO, Mirae Asset Investment Managers India.
Connected with this is the contribution through the monthly systematic investment plans (SIPs), which declined for the third successive month. In June 2020, the figure stood at below `8,000 crore, or the lowest since November 2018. Even those, who wanted to continue with SIPs, were unable to do so. “This is worrying, but not completely unexpected given the strain on incomes due to the COVID-19 situation,” explains G. Pradeepkumar, CEO, Union AMC.
Expert Advice: Absolute returns over the past one year (July-June) were negative for most of the equity-linked mutual funds, whether they were focussed on large-caps, mid-caps or small-caps. In the past two months, the indices have perked up. However, this may be a temporary phenomenon as it is possibly driven by the liquidity initiatives taken by global central banks. The markets moved northwards, not just in India but across the globe.
Ideally, investors shouldn’t move in and out of equities based on short-term gyrations. “If someone was not in equity, she shouldn’t get in now as she was never meant to be in stocks. If you have a six-month horizon, and need returns in this period, this is not the market to be in equity. Invest in shares only if you have a 5-7 year time frame. More important, don’t juggle your original allocations, and become either underweight or overweight on stocks,” warns Kumar.
The cash conundrum
One of the reasons why most of us got out of equities, or stopped SIPs, was to stay in cash. This was either because of the uncertainty on the income fronts, or because we were disgusted with the returns through mutual funds, and wanted to trade on our own. Since most of us stayed at home between April and June, we felt that we could utilise our time better and invest independently and directly in stocks. Experts feel that this is a dangerous precedent.
In fact, they argue that the cancellation of SIPs is a bad strategy. Individuals should take steps to ensure that they manage to continue with them. Apart from the fact that SIPs can enhance your wealth, they are also a form of forced savings over a longer period. Of late, there was a huge influx of youngsters in the SIPs and mutual fund spaces. This needs to continue for the overall investment climate, and also the future health of the country’s economy. Expert Advice: “If both the hypotheses are correct – people cancelled SIPs either because of cash-flow issues or to trade in shares on their personal accounts it is not good news. The first implies that individuals tend to lose their discipline in investments. Personalised trading may sound attractive, but how much can you earn through it?” questions Jimmy Patel, MD & CEO, Quantum Mutual Fund.
More than cash, debt is possibly the safest way to keep your investments intact. Investors did opt for it, as is evident from the trends in mutual funds in the April-June 2020 quarter. In May, `63,666 crore was added to the debt funds. Although inflows declined by 95.5 per cent in June, compared to May, most schemes showed positive trends, apart from the high-risk ones such as liquid, credit risk, and medium duration ones. The action in a few sub-categories was hectic.
In the low duration funds, there was an inflow of `12,236 crore in June. In the same month, the accretion to short-term duration schemes zoomed by over 300 per cent on a month-on-month basis and the figure for those that invest in corporate bonds went up by 180 per cent. Investors felt comfortable as these funds have exposures in low-risk AAA-rated instruments, and zero-risk government securities, and allow them to redeem their money in shorter periods.
This is normal in times of crises and in a scenario when interest rates fall, and pull down the average yields. “Yields are well supported and the curve has become fairly steep because of large system liquidity which is chasing assets. The surplus liquidity, lesser issuances in the market and expectation of reverse repo rate cut by RBI in August is likely to support yields at the shorter end of the curve,” says Amandeep Chopra - Group President & Head of Fixed Income at UTI AMC.
According to a recent report by CARE Ratings, the secondary market yields on government and corporate securities declined sharply to two-year lows in June 2020. While the average yield in the latter was down by 68 basis points between May and June 2020, the figure for the benchmark 10-year government securities was 21 basis points.
According to Lakshmi Iyer, Chief Investment Officer (Debt) & Head (Products), Kotak Mahindra Asset Management, the benign interest rate regime means investors wish to be in fixed income investments with longer maturities. “Gilt, banking, and public sector funds are best suited to meet such requirements. The bulk of flows are gravitating towards high-grade/sovereign-oriented portfolios, which have little or no credit dilution. This trend is likely to continue.” She adds.
Expert Advice: “Since the yield curve continues to remain steep due to high risk aversion, short and medium duration funds present an interesting investment opportunity,” says S. Naren, ED & CIO, ICICI Prudential AMC For those, who have a longer-term horizon, the openings lie in dynamic duration schemes, in which the fund managers have the flexibility to change their strategies based on the evolving environment in the debt segment, he adds.
The bullion lining
Since 2019, ever since the Indian economy was gripped by an ongoing slowdown, which escalated into the COVID-19 nightmare, Gold ETFs have emerged as one of the better-performing financial assets. In June 2020, this category received inflows of `494 crore, which were lower than the figures for April (`731 crore) and May (`815 crore). However, the overall AUM of Gold ETFs increased by 7 per cent in June, compared to the previous month.
Recently, gold prices in India crossed the `50,000 (per 10 gm) mark, and experts speculate that they will continue to rise as central banks liberally open their credit pipelines. “Uncertainty is gold’s friend, and its northward journey is set to continue,” says Iyer. “Gold functions as a strategic asset given its ability to act as an effective diversifier, and alleviate losses during tough conditions,” adds Himanshu Srivastava, Associate Director (Manager Research), Morningstar India.
Expert Advice: “Given the favourable outlook for gold prices, one could see the AUM of Gold ETFs to grow in the near future,” predicts Kotak’s Iyer. Quantum’s Patel avers that as a thumb rule, gold has to comprise 15-20 per cent of an individual’s asset allocation. “But it may not be such a bad idea to enhance the exposure levels in this environment,” he adds. Mirae’s Mohanty says in another context, “Instead of a chaser of returns, one should become a gold chaser.”
However, on an overall basis, the choice between risk and safety is tricky. Investment pursuits in these trying times have to do as much with an attempt to increase returns, as with the specific risk-profile of each person. In fact, according to experts, a bewildering event like COVID-19 can act as a natural profiler for most investors. It is during an unexpected crisis that people tend to comprehend their real risk-appetite, and the pain that they can stomach.
For example, mutual funds come with a disclaimer that the products are subject to market risks. But an investor understands the implications of the rider, and how the risks undermine her wealth, only after a crisis unfolds. Therefore, this may be a unique chance to look oneself in the mirror, and ask a relevant question: How risk averse I am? From there, it is simpler to chase the right choices, and manage a correct balance between risk and safety