Expect Good Things In 2016

Hemant Rustagi
CEO, Wiseinvest Advisors

The year 2015 has unfortunately turned out to be a tough year for equity fund investors in India. Therefore, all those investors who may have invested in equity funds with an intention of making quick money must be ruing their decision now. That’s why, investment decisions must be made on the basis of one’s time horizon, risk profile and investment objectives rather than just relying on the market sentiments.

Since volatility in the stock market is a natural phenomenon, investors have faced similar situations on a number of occasions before. However, it is heartening to see a large section of investors still remaining committed to their asset allocation and time horizon thus continuing their process un-interruptedly through tough times. Needless to say, systematic investments made during these volatile days will help them improve their portfolio returns over time. The ever increasing number of investors adopting the strategy of investing through SIP augurs well for their investment process as well as for the markets. Investors who have been following this approach must continue with it in 2016 and beyond.

The year 2016 is likely to be a better one for equity markets.The macro-economic environment is showing signs of improvement and the growth is likely to accelerate going forward. Of course, the government’s ability to push the reform agenda remains the key for sustainable growth. Besides, equity as an asset class is under-owned.Therefore, investors with a longer term horizon must include equity funds in their portfolio with a clearly defined time horizon.

However,the portfolio should have a bias toward large cap stocks/funds with an exposure of 60 per cent or more.Out of the remaining 40 per cent, a major part can be allocated to mid-cap funds. Since stock picking is crucial specifically for small and mid-cap segments, investors need to select funds that have a consistent performance track record.

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There was a bullish undertone to the debt market on the expectation of impending rate cut by the RBI at the start of 2015. The RBI’s decision to cut interest rates by 125 basis points during the year indicates that it was willing to act within windows of opportunities provided the enabling factors are in place. Beyond the rate cut, the RBI has also proposed a two- year road map to increase foreign portfolio investors participation in central and various state government securities which will broaden the debt market. Overall, we are likely to see a downward bias in interest rates during 2016.

A scenario like this surely provides an opportunity for investors to invest in debt funds and benefit from the inverse relationship that exists between bond prices and interest rates. Investors who have a time horizon of three years or more can consider investing in dynamic bond funds. In fact, the focus should be on funds that have a quality portfolio. For a horizon of 1-2 years, equity savings funds can be a great option both in terms of potential and tax efficiency of returns. For an investment period of 2-3 years, hybrid funds that invest in a similar mix but with a higher exposure to equities can be a great option.

While choosing the right investment holds the key to investment success, it is equally important to follow the right investment strategy. If you haven’t been following the right investment process, you can make amends in 2016. To do so, you must follow the process of financial planning. This would involve listing out your goals, assigning time horizon and a target to each of these goals and then decide an appropriate asset mix to achieve them.

Investing as per your asset allocation and maintaining that through your defined time horizon will ensure that your portfolio doesn’t take you beyond your risk taking capacity and there are no short falls at the end of the designated time period. This will also help you avoid making haphazard investment decisions.

While investing in line with one’s asset allocation is important, it may be worthwhile realigning the portfolio within each asset class once a year. For example, by changing allocations to different segments of the equity market like small, mid and large cap, one can benefit both in terms of maintaining the right balance between risk and reward as well as earning higher returns. For this exercise, the beginning of a new year can be the right time. So, analyse your portfolio right at the start of 2016 and don’t hesitate to make changes in it, if required.

While incremental savings in 2016 can be deployed differently from what was planned in 2015, allocating a part of it for existing goals will ensure that there is no shortfall even if one has to experience some bad years during the defined time horizon.

Hemant Rustagi