INVEST REGULARLY

Don’t try to time the market. It is good advice that is ignored often. It is not always possible to get your entry and exit timing right. So, draw up a financial plan that enables you to diversify and invest systematically. ICICI Prudential Mutual Fund, in collaboration with MONEY TODAY, has been organising investor conferences, Investor Awareness Initiative—2011, in several cities to popularise this.

Here are excerpts from the interactive session during the third such conference held in Bangalore. The speakers were AJ Harikrishna Raj, Zonal Business Head—Retail Sales and Distribution, South Zone, ICICI Prudential AMC, and Tanvi Varma, Associate Editor, MONEY TODAY.

While choosing a product how do we know which is the right product for us? Once you have established your goals, the choice of investing in a product should be based on your investment objectives, your risk appetite and your liquidity requirement. Decide if you want to invest in debt, equity, gold or a combination of these. Base it on the purpose of the investment. The standard theory assumes an investment in equities (as a percentage of your asset allocation) of 100 minus your age. However, if you are, say, saving for your child’s college tuition to be paid less than a year away, choosing an equity-oriented product may not be ideal considering it is not a long-term investment.

Are mutual funds only for those investors who have a monthly salary or will it also work those who have irregular income? Mutual funds are for all investors since these are open-ended schemes that lets you enter and exit when you like. An employed individual can choose a systematic investment option (SIP) on a monthly basis while those with irregular incomes can make a lumpsum investment when there is a windfall. Further, there is the option of a systematic transfer plan. Here, the amount can be invested into a liquid fund as a lumpsum and the investor can transfer this money into an equity fund on a daily, weekly, monthly or quarterly basis.

Is investing in a lumpsum more risky than a monthly investment? No, it is not. Staying invested in equities over a long period evens out volatility. The method you choose, lumpsum or SIP, depends on your ability to take risk. You can invest a lumpsum even today, but you must be patient and stay invested considering volatility is here to stay. It is not possible to time the market and so there is never a perfect time for an investment. Markets go through cycles, such as the 2004-7 rally, the correction of 2008-9 and then the upswing in 2009-10. So, choose a suitable product and stick to your plan.

When should one stop SIP investments or move out of a particular fund? First see which institution backs the fund house. Then look at funds that have stuck to their investment plan over longer periods and remain invested. Any investment is need-based. So, if a 10-year SIP fulfills your need, that’s the time you stop that investment and use the money. While deciding on when to move out of a fund, consider the fund’s performance over a long period. Many funds may have short-term falls but have performed well over a period. Also, it is important to compare funds with similar objectives.

Funds offer the facility of switching between equity and debt. When should one be switching from equity to debt? Funds have various options to switch or redeem your investment when you reach a certain level of appreciation, say 10%, 15% or 100%. These are various target points for an investor. You can make a choice at the time of investment. When it hits the trigger; either the appreciation amount or the entire investment gets switched or redeemed automatically. If you have not opted for a switch, funds will not do so because they don’t have the mandate for it.

We structure our plans on the basis of certain assumptions, such as inflation and interest rates. However, these vary and nobody has control over it. In such a situation, how can a financial goal be achieved over a fixed tenure? Reviewing your assumptions is important while developing your financial plan. This allows you to monitor the progress of your plan and adjust it if the financial environment has changed. Typically, any financial plan would require a review every three-six months. Having said that, most assumptions are based on historical data. Thus if inflation has remained at 5% for a few decades, then you tend to take that figure into account.