The Hindu Business Line : Markets' superior long-term performance comes with volatility

Kolkata March 25 Is this a time to forget equity temporarily? Mr Brijesh Dalmia, a Certified Financial Planner, tries to answer that question. In an era of high interest rates, investors should examine their existing debt investments and do a cost benefit analysis to find out if these should be redeemed and higher yielding products chosen in their place, he argues.

Excerpts.

FMPs are quite relevant today. What is their future?

FMPs are clearly the flavour. The recent growth in MFs' assets can largely be attributed to these products. Increase in interest rates, higher volatility in stocks, unattractive IPOs have all forced investors to consider FMPs as an alternative.

Pre-tax yield on FMPs (3-months and 13-months) are currently in the 10.25-10.5 per cent per annum range. This makes them superior to bank deposits.

Further, while bank interest is taxed at the marginal rate, FMPs (over one year) provide the benefit of long term capital gains, which is charged at a lower rate of 10 per cent.

Dividends are also tax-free in FMPs, although a dividend distribution tax is applicable.

All told, FMPs provide adequate safety combined with decent returns. Their demand will depend on the spread between corporate papers and government securities.

If the spread continues to be good, we will see good demand for FMPs.

Is there scope for an average investor for fresh allocation to equity? Isn't the market too volatile for him?

Markets have always been volatile. Fresh allocation to equity is really a function of objective, time horizon and asset allocation.

If you wish to invest for 5-10 years and the fresh investment is within your asset allocation program, you may go ahead. But if you are taking a 6-12 months view, I would advise you to stay away.

Markets have a tendency to behave irrationally in the short term.

Their superior long-term performance comes with volatility. Everything that happened in the last 10 years may happen in the next 10 years - political uncertainty, war, rising inflation and much more.

However, any one who invested 10 years back and holding his investments now, is probably very wealthy.

Aren't there too many confusing products in the MF space right now? Consider especially me-too NFOs.

Right. Other than pure sector funds, if you look at stock holding patterns of most diversified equity funds, you will find a common list of stocks.

Even in case of debt funds, the choices have increased. An investor must understand that it is neither feasible nor worth investing in each new fund.

It is always better to bet on existing funds with a track record rather than investing in new ones. A portfolio of 6-7 funds is perhaps sufficient for generating above-average returns with adequate diversification.

How are you now advising investors to look at debt? Is there a case for higher exposure to debt now?

With the recent increase in the interest rates, debt has become attractive and it makes sense to look at it afresh.

An increased exposure to debt at this juncture is recommended. But again, as I have said, allocation (to debt or equity) is a function of many factors.

If the investor's objective has been achieved and he is seeking to encash his equity holdings in the next 1-2 years, this is probably the right time.

However, systematic allocation for longer periods may continue. In the current era of high interest rates, I would rather ask him to look into existing debt investments and do a cost benefit analysis.

The idea is to ascertain whether converting existing investments into higher yielding products is worthwhile.

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