FINANCIAL PLANNING : A Reality Check

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Thursday 31 July 2008

Who is 'KING'? Equity, debt or cash?

This is one helluva time for investments. With stock markets down and interest rates on an upwards spiral, all the three instruments today are ‘kings’ in their own right

This is one question which everyone today is confused about. Should one invest in the equity markets now or in fixed maturity plans (FMPs) and other debt instruments or is it best to be in cash (meaning cash at bank or in liquid funds; I am not referring to bundles stashed underneath your mattress).

The answer would vary from one individual to another. Of course, it would depend on certain factors like risk profile, tenure of investment, allocation, etc. But if I were to speak from a general point of view, I think this is a good time for all round investment. In short, all the three components are king!

Equities have had a downward roller-coaster ride since January 2008. The Sensex has slipped by over 30% since the beginning of this year with sectors like real estate and banking being pummeled by over 50%. With most people being caught between the devil and the deep sea, it is more out of compulsion that they are not in a position to sell their stocks today. So is this the ‘right’ time to get into equity or equity-related instruments? Well, I would say yes. But your perspective should be long-term perspective. In the short-term, your investments will encounter more volatility. Therefore, the selection of quality funds / stocks is imperative.

Now you would ask – “what about debt?” With deposit rates moving up, both FMPs and fixed deposits look attractive. With indicative ‘post-tax’ returns of 9-9.5%, FMPs and liquid funds are attractive options for the risk-averse, who fall in the highest tax bracket. For those in the nil or lowest tax bracket, FDs present a good investment avenue.

For those who are ‘convinced’ that markets have not bottomed out yet, cash is the ultimate answer. I would still recommend you to invest via the SIP option rather than trying to catch the bottom (which, in any case, is more a matter of chance than actual skill).

This is one of those ‘rare’ times when investing in both equity and debt is a good option. It is extremely rare to witness times when good opportunities present themselves both in the equity and debt segments. And with such volatility in the markets, it is always good to keep some cash ready to invest -- either when the markets slips further or when the interest rates rise again. Happy investing!

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