Equity markets in India have given very good returns in comparison with other asset classes (in the recent past). The higher returns of equity products are driving further investments into them. Their case is also made better because post demonetization in India, assets like gold and real estate have become stagnant. Also, interest rates on Fixed Deposits and Government Savings (like postal savings) are also being dropped continuously. Lower returns in other economies and easy liquidity is also attracting global capital to Indian equity markets.
Higher returns of equity would get reflected in one’s equity portfolio through stocks, equity mutual funds, Equity PMS and ULIP (Unit Linked Insurance Plans). However, during such euphoric phase’s lot of investors make fundamental mistakes, only to regret later. I have listed some of them for the benefit of readers. The word equity below would mean Direct Equity, Equity PMS, Equity Mutual Fund, Hybrid Mutual Fund and ULIPs (Unit Linked Insurance Plans).
1. Equity oriented Portfolio for regular monthly income: Lower Interest rates have made many first time investors move to hybrid equity products like balanced mutual funds for their regular income requirements. Many are driven by the high past returns in comparison to the current FD rates. Do note, equity portfolios are best suited for building wealth over a period of time. They are however very volatile in short term and can give lot of sleepless nights. Investors can have a terrible experience if equity assets are the predominant source of regular income. Do note 12% p.a. return over the last 5 years in not equivalent to 12% p.a. every year or 1% per month.
2. Equity oriented Portfolio as an alternative to banking products: : Many bankers and agents are suggesting equity oriented portfolios ( ULIP’s , equity mutual funds and balanced funds) to their customers as an higher return alternative to Fixed Deposits. Please note that these are market linked investments and hence do not assure higher returns. ULIPs, apart from having market risk, also carry higher charges/expenses. If one is coming in these for a time horizon less than 5 years, than the experience might not be very good.
3. Increasing allocation to Equity Oriented Portfolio due to past performance: Allocation to equity should be based on one’s risk profile and investment horizon. Having larger allocation in equity oriented portfolio with an investment horizon of less than 3 years would be extremely dangerous. Do not get influenced by the past returns.
4. Lured by assured dividends of equity/balanced funds: Many balanced mutual funds have started declaring regular monthly dividends which is attracting many investors believing these are assured regular income. Do note that, dividends are not a statutory obligation but are given as part of the profits of the mutual funds. Hence, investors should have made adequate provisions in other asset classes/financial products for regular income. Dividends should only be a secondary source of income.
5. Investing large portion in Midcap and Small Cap Stocks/Funds: Portfolios allocated to these have given phenomenal returns in the recent past. However, please understand that these carry very large risks in comparison to diversified portfolios.
To conclude, equity continues to be one of the best asset classes to beat inflation and to get tax efficient returns. However, not respecting the risk factors of equity can have a very bad effect on investor’s portfolio (in the shorter term) and their future experiences.
“It is best to learn from past mistakes than losing one’s hard earned money”.
1. Market linked investments like Mutual Funds and Equity share investments are subject to market risks. Kindly read the scheme information documents carefully before investing.
2. All other investments too have different levels of risk like credit risk, regulatory risk etc. Appreciate this before initiating any investments.
3. Past performance of any asset class is not an indicator of future performance.
4. It is very important to consult a professional planner while implementing any of the above ideas.
5. The above are mere suggestions and not Investment Advice as individual cases might differ.
In case, you would like professional financial guidance, than feel free to connect to me at 9845557582 or firstname.lastname@example.org.
Naveen Julian Rego-CFP
SEBI Registered Investment Adviser
14th June 2017