Time to hold on to cash

With the Sensex tanking over 1,000 points in the past two trading sessions and bond yields rising to over nine per cent due to a fall in the rupee, investors are in a tight spot. Returns on investment, already going through a rough patch, have plummeted.

The question is whether it is time to go back to traditional instruments such as gold and fixed deposits (FDs). The former was at Rs 31,155 per 10g on Monday.

The advice from Ajay Bagga, managing director and head of private wealth management, Deutsche Bank, is simple. “Stay on the sidelines. But wait for the opportunities. Opportunity will come both in equity and debt. Stay liquid. Stay solvent."

The present circumstances do not give much confidence. In the past three months, the Sensex has fallen by 9.75 per cent. Diversified equity funds have fallen 9.7 per cent. 

Debt funds, a traditional investor’s favourite asset class for some time now, have taken a sharp knock. Bond yields have gone past nine per cent, taking a toll on bond funds, especially long-term ones, which plunged 7.1 per cent in three months. Debt income funds have dived 4.25 per cent in three months, shows data from Value Research (see box). Experts advise that one should review their bond funds but not react to the panic in the markets. Says Vishal Kapoor, head of wealth management, Standard Chartered: “This is a mark-to-market loss (on writing down the assets on current values). A reaction to sell or switch is unwarranted.”

Market experts also say there will be opportunities soon. Says Parag Parikh, chairman, Parag Parikh Financial Advisory Services, “Good stocks are available at a 30 per cent discount. So, there are buying opportunities. But don’t put all your eggs in the same basket.” According to him, one could look at investing 25 per cent and invest in three-four tranches.

For debt investors, given the volatility, experts advise to stay invest in very short-term liquid funds or short-term bond funds. Wealth managers are also suggesting that investors stick to high-quality bonds, those largely AAA-rated, and to not look beyond such funds.

In the short term, the traditional FD has also been gaining ground with investors. However, wealth managers say here, too, investors should invest for the short duration, such as two or three months. The trend is already there. “We are seeing more entry into the shorter end of the debt market segment and in fixed maturity plans (FMPs),” adds Bagga. Investors could get an opportunity to invest at higher yields in the longer run.

If the trend continues, the interest rate on FDs is expected to go up. There has been a spate of increase in issuance of FMPs at better yields. Experts say one should look at high-quality short-term FMPs.

As Bagga says: “For a bit of diversification outside the rupee, one should take a look at feeder funds that invest in the US market. It also helps to hedge the currency.” Feeder funds that invest into the US market have risen lately on the back of the rupee’s fall.

Then, there is gold. The yellow metal has held firm, thanks to the festive demand. Besides, the scarcity premium has increased in the domestic market and, of course, the falling rupee. Experts say it could be a very low part of your asset allocation now, purely for the sake of diversification into another asset class. Gold should not be more than five per cent of your portfolio.

This Article is written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com.

Business Standard