A financial planner had an interesting episode to narrate. He had recommended an equity allocation of 25 per cent to a client and suggested that 75 per cent be placed in debt. The client felt that the allocation to equity was way too high. His fear was that 25 per cent of the
portfolio would be in 'speculative investments'. But the advice of the financial planner prevailed. This took place in 2002.
Five years later, when this very
client's Public Provident Fund
(PPF) matured, he wanted to put
the entire amount in stocks.
Suddenly, the stock market was
not speculative in his mind, but a great place to earn fabulous
returns. Fortunately for him, the
good sense of the financial planner
once again prevailed.
This is not an isolated instance.
Unfortunately, for most investors, it
is often the bull or bear run that
will determine their preference for
a particular asset. During a bull
run, they will all flock to equities
and when the market crashes,
everyone is suddenly paralysed by
market uncertainty and fear. Which
is really ironical, since the risk of
losing money at 13,000 is much
less than when the Sensex is at
20,000. In 2002, when the Sensex
was around 3,200 levels, inflows
into equity mutual funds were Rs
4,517 crore. In 2007, when the
Sensex was in the range of 14,000
to 20,000, inflows into equity
mutual funds totalled Rs 1,07,189
crore.* Investors were far more
willing to buy equities at higher
rather than lower prices!
Right now, when stocks are getting
whipsawed and interest rates
appear seductive, the instinctive
reaction is to run to a safer haven.
But abandoning equities now and
moving to debt and cash would be
a mistake. Those who under invest
in stocks are left flat-footed when
the market recovers. And equities,
as an asset, must have a place in
your portfolio. Irrespective of the
state the market is in.
In fact, if your equity holdings
have been beaten down substantially,
then you could make some
refinements to your portfolio.
Check to see by how much your
portfolio has deviated from your
predetermined allocation. If your
equity allocation has fallen substantially,
you should focus on
increasing it. Stay focussed on your
strategy. Not on the market.
* These figures have been provided by HDFC Mutual Fund in a note sent out by Prashant Jain.
Also read: A tale of three home loan EMIs
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