Sensex @ 30,000: What Experts Won’t Tell You

The S&P BSE Sensex has breached the 30,000 points mark. Celebratory cakes have been cut, and anchors of business channels have experienced bouts of ecstasy on live television. The print media has published statistics on markets' journey and performance. Clearly, these quarters are abundantly excited.

With investments delivering handsomely, investors have reason to cheer as well. However, not every investor shares the excitement palpable in the media. For some, markets touching record highs has led to anxious moments. These investors have been singed by markets in the past, especially after sharp surges.

For such investors, the all-important question is: Where are markets headed next? Will they continue to surge, or is another crash on the cards?

As is often the case, investors are seeking answers from experts who routinely feature in the media. However, even a cursory glance at quotes and op-eds reveals that experts have chosen to tread the middle path.

For instance, they strike an optimistic note by mentioning India’s strong fundamentals, conducive macroeconomic environment, expectations of robust flows. Simultaneously, they sound a note of caution by speaking about how earnings have failed to keep pace with markets, expensive valuations in certain market segments, and global factors such as the US Fed's stance.

It is evident that investors who are seeking an unambiguous answer from experts will be disappointed.

And, here’s why—No one knows where markets are headed in the near-term. While experts can make reasonable estimates of how markets will play out over the long-term, predicting near-term movements is anyone’s guess.

The trouble is that no expert will risk losing his ‘halo’ by publicly saying “I don’t know how markets will behave in the near-term”. Likewise, no print publication or channel is interested in quoting an expert who says so, or simply advises investors to focus on the long-term.

As a result, investors are subjected to convoluted and non-committal views from experts.

What investors must do

On their part, investors would do well to look inwards, instead of relying on experts.

Investing is a personalised activity. In other words, a ‘one size fits all’ approach doesn’t work. Hence, investment decisions must be made in line with one's risk appetite, temperament, and investment goals.

For instance, investors who are overly worried that an imminent crash might wipe out their gains, shouldn’t hesitate to book profits. In particular, investments that don’t agree with their profile; now is a good time to exit them at a gain.

Investors who are at ease with the vagaries of markets should continue to invest in line with their plans. For such investors, any downturn will present an attractive investment opportunity. 

Investors who find themselves between the extremes, can consider adopting a wait and watch approach.

The key lies in making a choice that works for you, and standing by it. That will lead to a far better investment experience, than relying on an expert who speaks half-truths.

Look who's talking!

Mutual funds are back with a bang! Pick up any newspaper and you are bound to come across a mutual fund related write-up or advertisement. Given the surge in equity markets, the performance of mutual funds has started looking up. And fund houses are sparing no effort (explicit or implicit) to spread the gospel of mutual funds. There are articles eulogising the impressive showing delivered by mutual funds in the recent past; also, the fact that the mutual fund industry now holds a record assets under management (AUM) size has been well-documented. Fund managers are busy giving out interviews highlighting how mutual funds will hold investors in good stead over the long-term. Dividends are being declared in a hurry by several funds to prove their prowess. Finally, some new fund offers (NFOs) have already been launched (more on this later in the article) and several others are on the way. All in all, it can be safely stated that mutual funds are back with a bang!

Circa October 2008
Not too long ago (October 2008 to be precise), the scenario was radically different. Equity funds had been hit hard by the sharp decline in equity markets; even 3-Yr performance numbers were in negative territory. Debt offerings like fixed maturity plans (FMPs) and liquid/liquid plus funds had come under the scanner on account of the liquidity crisis; questions were being raised about the quality of investments made by several funds. Simply put, mutual funds had become everyone's favourite 'whipping boys'. While all the criticism may not have been justified, some of it certainly was.

Interestingly, the response of fund houses to the demanding situation was rather curious. Most fund houses went into a 'silent' mode and simply chose not to react. When relationship managers were contacted for information about their funds, the standard response was, "everything is fine; there is nothing to worry about". Requests for one-on-one interviews with fund managers were either instantly turned down on the grounds that the fund manager was busy or stalled with the excuse - "we'll get back to you on this one". While some fund houses/fund managers were willing to go on record about the nature and quality of their fund portfolios, they were strictly in a minority.

Odd isn't it. In a time of crisis, fund houses, instead of communicating with investors to assuage their concerns, chose to go into hiding. And now, when the going is good, fund houses are acting like 10-yr old over-energetic blabbermouths who can't keep mum. That tells you something about fund houses, doesn't it?

As for the NFOs, at any sign of rising markets and a revival in investor interest, they make a comeback. Already, we have had a round of the 'target return' NFOs. Simply put, these are funds wherein there is an inbuilt clause for booking profits when a certain return (as specified by the investor) is clocked. In most cases, the profits are booked and invested in a debt fund from the same fund house. For investors who were ruing the fact that they didn't book profits when markets peaked in January 2008, only to see the value of their investments plummet subsequently, these NFOs struck a chord.

Here's a thought - is it prudent for mutual funds to book profits for investors or is that something investors should be independently dealing with after taking into account factors like their individual financial goals, the investment scenario and the performance of their investment portfolio as a whole. Also, let's not forget that regularly 'booking profits' for every individual investor at a fund level, just might force the fund manager to prematurely sell some quality stocks from his portfolio. This in turn, could be detrimental to the long-term interests of the fund.

But given the receptiveness shown by investors, fund houses were only more than happy to launch a slew of 'target return' funds. Some introduced the facility to book profits in their existing funds. Of course, the fact that even after booking profits, (on account of transfer of profits booked into a debt fund) there is no fall in the AUM of the fund house doesn't hurt the latter's cause. Rest assured, with the markets moving northwards at a brisk pace, it's only a matter of time before a number of NFOs hit the markets.

What investors must do
Given that fund houses have failed to distinguish themselves, it is fair to state that investors would do well not to blindly follow them while making investment decisions. Going forward, fund houses will try to entice investors by making them believe that all is hunky dory and now is the time to get invested lock, stock and barrel. Can't blame them, it's the AUM that translates into income for them. Hence, higher the AUM i.e. more investments made by investors, the better it is for fund houses.

On the other hand, investors need to be a lot more pragmatic. They should not get carried away by all the hype being whipped up by fund houses. Instead, they should use the downturn and despondency that they witnessed and experienced not too long ago, to make a fair evaluation of their risk-taking ability. This can help them determine what portion of the investment portfolio should be allocated to mutual funds. While no one would dispute the ability of well-managed mutual funds to add value to investors' portfolios, there is certainly a need to guard against making investments in a reckless manner.