1. Wealth management: Investors must look at credit risk of companies before investing

Wealth management: Investors must look at credit risk of companies before investing

In 2015, the Sensex dropped over 6% and the corporate results were not in line with the stock price. Many investors who missed the 30% rally in Sensex in 2014...

By: | Updated: January 5, 2016 1:56 PM
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Credit risk is the key factor to be considered while investing in debt. Guessing the interest rate movements are best left to the experts

In 2015, the Sensex dropped over 6% and the corporate results were not in line with the stock price. Many investors who missed the 30% rally in Sensex in 2014 and had entered market in early part of 2015, have seen their portfolio erode.

While the large-cap stocks have disappointed, mid and small-cap stocks have witnessed extreme volatility.
Despite the fall in the benchmark, many savvy investors have had their share of stock specific gains. In direct equity investing, one should not look at just benchmark – Sensex or Nifty or S&P 500 – and instead do cherry-picking based on the fundamentals of companies.

The debt funds during the year delivered positive returns. However, an instance of a corporate defaulting in repayment did shake investors’ confidence. So, investors must look at credit risk of companies before investing. With RBI reducing rates and Fed increasing, it will be prudent not to forecast on the interest rate movements.
Gold as an asset class has only continued to disappoint investors and not the end users. The price of the metal has fallen by nearly 15% over the past two years. However, as a prudent asset allocation, gold should be a part of the overall portfolio. Real estate, as an investment asset class, has only added to the disappointment. With inventory levels at all-time highs across metros, for an end user, there was never a better opportunity to own a piece of real estate. With the current inventory levels, prices are not expected to go north.

One could get lucky, but attributing success to luck is hardly the method and process of investing. The most important thing an investor must put in place is an investment policy statement. Geo-political changes, natural causes, climatic change, random events would impact the markets and an investors cannot have any control on such events. But are these the factors, which an investor should really consider as the key before investing. As an investor, you do not have control on these factors. What is controllable is what you should look at.

Revisiting the portfolio and getting the asset allocation in place is the way forward. Direct equity as an asset class should be stock specific. For disciplined investing, mutual funds and systematic investment plans (SIPs) are the most convenient and efficient way to invest in the markets for a long-period. Returns in SIPs started in early 2013 was neutral at the end of the year. But in 2014, with the Sensex delivering close to 30% return, the SIP returns also moved up significantly. So, an investor must look at a disciplined approach of investing.

Credit risk is the key factor to be considered while investing in debt. Guessing the interest rate movements are best left to the experts.

Liquid mutual funds does merit a look for parking the surplus funds instead of just bank deposits. Gold and real estate as an asset class need to be considered. An exposure to these asset classes will depend upon each investor’s short, medium and long-term needs, requirements and goals.

As a golden rule, one must always remember that investing is a process and many a times, you need to watch and have patience in the process. Take time to invest and choose the asset class which suits you. Immediate and knee jerk reactions will cause trouble and random events in the geopolitical space will have short term impacts on your portfolio.

The writer is founder and managing partner, BellWether Advisors LLP

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