The market’s volatility has earned the wrath of many investors, especially, those new on the block. Equity investments are not frothing with returns like before, and the constant ups and downs have forced even the veterans to take a backseat and ponder their next step. In the world of investing where no gains or losses are permanent, Viral Bhatt, Founder, Money Mantra - A personal finance solution firm is steadfast with his next investing strategy. He explains why investors must opt for SIP investments and the importance of fixed-income products to benefit from the rise in interest rates.
Q. You have been a financial advisor for a very long time. What are the key concerns of your clients in the present situation? What has been your advice to them?
With the markets going up and down, investors see more volatile ahead with a major impact on their equity portfolios. As a result, many have stalled their equity investments or have opted for substantial redemption. A stock market correction is not a new phenomenon and historical trends indicate that stock markets gradually recover after a steep fall. Equity instruments help in beating inflation in the long term. It’s perfectly okay to be cautious when the market is risky, but at the same time, you should not lose any opportunity to earn higher returns.
Q. Do you think this is the right time for investors to buy stocks or should they wait a bit?
You can avoid large lump sum investments when the markets are correcting and instead opt for systematic investment plans (SIPs). Good quality large cap and mid-cap stocks also give a good opportunity to buy more and you can average out your current equity stocks holdings.
Additionally, you should also work on a well-balanced diversified investment portfolio with your funds and stocks invested across asset classes so that your returns keep on growing irrespective of the market movement and volatility.
Q. Interest rates are rising. What avenues of investing are you suggesting to your clients?
The impact of rising interest rates will vary across fixed-income products. While bank deposit and corporate bond investors stand to gain from the likely hike in interest rates on deposits and higher coupon rates on bonds, long-term debt mutual fund investors could suffer due to rising bond yields. Several non-convertible debentures (NCDs) and company FDs are offering attractive interest rates. Many companies will offer NCDs in the coming months and, as interest rates are likely to inch up further, their rates are likely to be better than being currently offered. By investing at different stages of the rate cycle, you can build a pool of investments that will mature at different points in time. This way, the entire corpus will not be subjected to reinvestment risk at the time of maturity. Besides, it is better to spread your money across two to three companies than to risk your entire capital with a single issuer.
While coupon rates on company bonds and fixed deposits are looking attractive now, I advise caution. Higher coupon often comes with larger credit risk. If a company defaults on loan obligations, your entire principal gets compromised. Investors must particularly avoid unsecured NCDs.
Q. What are your views on debt funds in this market?
Stick to short-term funds and fixed maturity plans
When interest rates are expected to rise, bond prices tend to fall, resulting in a fall in the net asset value (NAVs) of bond funds. Interest rates and bond yields move in the same direction. But, the rise in bond yield does not affect all bonds in the same manner.
Longer-duration bonds are more sensitive to rate movements and their prices take a bigger hit when yields rise. While these can potentially deliver higher returns if interest rates go south, investors can incur sharp losses if their call goes wrong. Amid the uncertainty on yields, bond fund investors need to be cautious. This is not the time to consider longer-duration funds. It makes sense to remain invested in accrual and short-term funds. These funds will help capture rising interest rates through higher accrual income while remaining largely unaffected if yields push up further. Even if yields rise in the near term, the higher accrual income will compensate for any losses due to a fall in bond prices.
Consider post-tax returns
When identifying fixed income instruments, investors should also account for post-tax returns. For instance, bank fixed deposits, recurring deposits and small savings schemes’ after-tax returns have fallen over the past few years. Interest rates on bank FDs have steadily dropped from near double digits to as low as five to six per cent.