Fixing investments

It’s almost a year-and-half since the last bull-run in the stock market ended in January 2008. And as the memory of those heady times recedes, so do investment habits spawned by it: undue belief in the power of equity to give uninterrupted returns as well as a general lack of prudence, self-restraint, circumspection and flexibility in making investment decisions.

Restoring balance Most investors, especially those with equity exposure, have incurred losses since Oct. 2008. In greater numbers than ever, they are now seeking the advice of financial planners. The changed perception among investors is spurring demand for financial planners. Investors are now showing greater concern about their investments than in the past.

For most equity investors, the runaway increase in stock prices had obviated the need for financial planning. They were too busy looking at the stock market indices to be bothered about the principles of sound asset allocation and a balanced investment portfolio.

However, all this is changing, especially since October 2008, thanks to the market crash that destroyed Rs 40 lakh crore of investor wealth in 2008. Many investors, who tried to make good their losses by playing on the volatility, have also burnt their fingers. Saddled with losses and unable to make sense of the market, these investors have been left with no recourse but to seek the help of financial planners to stem further losses.

Take the case of 43-year-old Mumbai-based Kamal K. Shah, who was widowed last year. Taking advice from brokers, she invested the money left by her husband equally in equity funds (through SIPs) and government savings bonds. The result: By the end of 2008, Shah’s four big-payout SIP schemes tanked more than 50 per cent. “It was the second setback for me in one year,” says Shah, who then chose to consult a financial planner to take her out of the mess. The planner closed most of the SIP schemes (including the four big ones) immediately to prevent further losses and went on to prepare a plan based on her risk appetite and monthly cash needs. Shah’s current portfolio is evenly spread out across equity funds, income funds, savings bonds and cash.

“At present, there is less panic compared to 4-5 months ago. I am now in a much better position to cover up my losses,” says Shah, who now spends a lot of time reading about the financial markets.

It’s not just greenhorn investors like Shah who are feeling the need to consult financial planners, even seasoned equity investors like 76-year-old Ramesh Bakshi are falling back upon expert advice. “I have been aggressive on equity throughout my life. But in the current market volatility, I am not sure my investments will be able to generate enough future income,” says Bakshi, adding that he needs Rs 50,000 per month to maintain his lifestyle.

Bakshi is seeking advice from a financial planner to bring down the equity component (stocks and funds) in his portfolio from 87.5 per cent to 62.5 per cent and increase the debt component accordingly by the end of 2009. “I am not geared to handle this exercise single-handedly. Based on their analysis and some inputs from me, financial advisors are chalking out plans to smoothen the process,” he says.

“Indiscriminate buying of funds and bonds in 2008 wiped out a substantial part of my portfolio. The financial advisor helped me build a balanced portfolio” Kamal Shah Shah was less conversant with systematic longterm investing and invested 50:50 in equities and government bonds last year. As markets tanked, her portfolio went down considerably. The financial planner asked her to book losses on her equity investments and brought in a fresh plan. ”I have 87.5 per cent of my investments in equities.To meet lifestyle expenses (Rs 50,000 pm), I want 37.5 per cent in debt instruments by year-end” Ramesh Bakshi His portfolio was skewed towards equities, so his planner had advised him in 2007 to shift money from equities to debt instruments.As the markets were bullish then, Bakshi, 76, did not pay heed. But now, he himself wants to do so and has got his planner to chalk out a plan.

The changed thinking among investors like Shah and Bakshi, in turn, is spurring demand for personal finance planners, for whom the bear phase is proving to be a boon. Says Surya Bhatia, Principal Consultant, Asset Managers: “Today, there are more people who are looking at asset allocation as a means to investment, a big shift from all-equity investments a year back. Ergo, there has been a momentous increase in the businesses of financial planners.”

Financial planners are also getting swamped with queries from existing clients. “Generally, queries from clients are determined by the index levels. They react to whatever they hear or see in the media.

So, for instance, if some bad economic news comes along and the market crashes, investors immediately call up to check if it’s time to exit. Similarly, if the market perks up the next day on good economic news, they become greedy and want to buy more,” says Hemant Rustagi, CEO, Wiseinvest Advisors.

According to financial consultants, many investors have approached them for advice after losing a sizeable sum. “During bullish or bearish market conditions, people invest in a sporadic fashion, without proper planning and objectives in mind. In such a situation, asset allocation often goes for a toss,” explains Viraj Ghatlia, Head (Business Development), ASK Wealth Advisors. Such investors often make emotional decisions, which may prove costly in the long-run, he says.

According to Sanjay Matai, Promoter, Wealth Architects, a financial consultancy, a lot of clients want their asset mix and portfolios shuffled at every rise and fall in the markets, and this must be avoided. “Worry is the biggest mistake for investors. It leads to individuals discontinuing their investment programme they carefully planned out before. You can time neither the bottom nor the top of the market.

The key is to look at periodical adjustments based on changing market conditions and continually rebalance your portfolio back to the target asset mix,” says Matai. Advisors say investors need to learn to rebalance between asset classes. For example, one might buy some good steel stocks along with diversified equity funds into a portfolio. But if the diversified funds also happen to invest significantly in steel stocks, then the portfolio may become heavily loaded with steel stocks. Hence, it is essential to assess the portfolio break-up and make adjustments accordingly. Also, investors must not try to average down in volatile markets. “Averaging is dangerous if it’s not done in a scientific manner. In most cases, money that goes into averaging is short-term money and not meant for the investment purpose. So if the stock continues to decline, there will be enormous pressure to take out that money by booking losses,” says Rustagi. According to him, when preparing an investment portfolio, one should define milestones such as child’s education, marriage, etc., and for each milestone allocate funds. “If it’s a long-term plan, invest aggressively in equities and switch to debt as the goal nears,” he says.

Advisors like Rustagi advise systematic transfer plan (STP) to beat volatility. Assuming an investor wants to invest Rs 1.2 lakh in equities, he will be told to invest the entire amount in liquid plus funds and over one year the planner will shift Rs 10,000 every month to equities. So, after three months, even if the market goes down by 20 per cent, the investor will lose only Rs 6,000 (Rs 30,000-Rs 24,000). “The plan is not completely foolproof, but it protects wealth by minimising losses in case of downfall,” says Rustagi.