India’s
GDP grew at 5.5% in April to June’12 quarter compared to 8% during the same
period last year. The GDP growth was 5.3% in last quarter of Jan to March’2012.
This is really an alarming situation. The market has reacted badly to this GDP
numbers and experts predict it is likely to fall further. There is a deadlock
in parliament over CAG report on coal allocations, lack of political will of
the government, GAAR issue, crude oil hovering above 95$ a barrel, rupee
constantly above 55 against $, higher inflation tying the hand of the RBI in
reducing the interest rates, worsening balance of payment and fiscal deficit
are the major concerns for the Indian economy. Further European crisis and Iran
Israel tussle may add fuel to the uncertainty. The things are going worse from
the bad and so no hope of any early revival in the economy. Experts are also
apprehensive feel of sovereign downgrade. Most of the equity investors are in a
confused state and unable to take any investment decision. Whether this standstill will continue till
next general election or we will have early general election? There are no specific
answers to any of these questions.
Than
what should lay investors do in the current market situation? Before coming to
solution one must look back and check what happened in the past. We have seen
nine governments in last twenty years post liberalisation, three major stock
scams, gulf war, Kargil war, communal riots, 26/11, US subprime crisis and
European debt crisis. Still India is a preferred destination for investment for
FIIs. What it tells us that uncertainty comes and goes, if you know what risk
you are taking than it may surprise you in the long run with good return. Risk
comes from not knowing what you are doing. If you take calculated risk it will
benefit you in the longer run. Economy also runs in a cycle; bad phase is also
not permanent.
Investors
must also try to understand equity as an asset class before investing. You
cannot expect overnight profit from equity as it is always a long term game. It
has always outperformed other assets class in the longer run. One should not
forget that returns from the equity over one year period is tax free. If you
understand and follow the basic rules of investing in equity then this
volatility in stock market will never affect you. Firstly your time horizon for
investing in equity should be minimum 5 years and above. You must invest as per
your asset allocation ratio and never go overboard and concentrate on single
asset class. You must also review your investment portfolio periodically and
rebalance the portfolio. Never try to time the market and always stay invested
is the success mantra for investing in equity.
Hardly
5 to 7% people of India invest in equity the others feel it’s gambling. Even
those who invest in equity want their money to be doubled in 3 to 6 months and
therefore end up losing their money. It
is also important how you invest in equity.
There are four different ways by which you can invest in equity. Direct
equity investment through stock market, Portfolio management schemes, Unit
linked Insurance plans and mutual fund investment. Direct investment through
stock markets requires in depth research and analysis and individually it is
not possible for us to do so. Therefore, it is not recommend investing directly in equity. ULIP and
PMS are also not advisable for retail investors looking at charges and
complexity of the products. SIP in mutual fund
schemes is the best solution for investing in equity for the long term in a
volatile market scenario. By investing through SIP you reap the advantage of
rupee cost averaging. , This lowers the average cost of your holding. Secondly
if you invest through SIP, you do not have to worry about daily volatility of
the market and thus do not have to time the market. Since SIP can be done with as small an amount
as five hundred rupees you can start with a small saving also and get the
advantage of power of compounding. It is not advisable to discontinue your SIPs
in the current market scenario. Tough time is always the best period to invest
in equity. It is rightly said it is the darkest before the dawn.
This article first published at moneycontrol.com
