For income generation, the products and asset allocation would be towards more predictable and lower standard deviation assets, which will have more predictable nature of returns.
In the nine trading sessions ending the week of September 5, BSE Sensex delivered a negative returns of over 5%. And over the last 19 trading sessions, over 10%. If you have been investing through mutual funds, the returns in the equity asset class is down. However, if you have invested in liquid funds in the debt category, then your return is positive.
There is no comparison between the two. In many instances, the portfolio of equity mutual funds, which were displaying a healthy double digit return at end of August 2018, is now displaying a low single digit or even a negative return. More so, if the allocation is more towards the mid and small-cap schemes.
A meeting with senior mutual fund practioners was organised in the third week of September titled ‘The Journey’ and we had CEOs and CIOs of top 10 mutual fund houses sharing their views and approach during the current period. Interestingly, the meet took place the day after Sensex saw an intra-day movement of more than 1,000 points and the DHFL stock fell by over 50% during the day.
In this information age, when data and news flow in a matter of a jiffy, it is important to dissect between information that is relevant and that which is trash. And one needs to be ready to handle the volatility in the equity markets. The 2008 financial crisis was initiated by the debt markets, which went on a borrowing spree without an asset-liability match. And at times, investing good money in suspect companies which did give a higher return. But then what is the use if the return of capital itself is not sure.
With data points available more easily today, the whole investing process should have been more easier. But looks like it has become more complex. What is data? What is rumour? What is paid information flow? It is very difficult to distinguish among these. In this scenario, it is important to have asset allocation in place right at the time of beginning of the investing journey. Also, you need to have the emotional quotient in place.
As an investor, when the markets are rising do you ask yourself what would be your reaction if the markets fall by over 20% at any given point of time? Do you have a strategy in place for this scenario?
For most investors, the gains in equity market over the last 18 months have been wiped out. So, it is time to ask yourself what should be the strategy now that the markets have corrected by over 20% and how do you plan to act on this?
Investing is not only about buying and holding. It is also about being active in the whole journey. And this process can be carried out and executed at all points of the investing journey. You only need to start and believe in the process.
And again, one needs to distinguish between income generation and wealth generation. Both the terms are used in the same wavelength, which should not be the case. For income generation, the products and asset allocation would be towards more predictable and lower standard deviation assets, which will have a more predictable nature of returns.
And in wealth generation, one could afford to have volatility and comparatively higher standard deviation. Whatever be the nature, having a process has today become more paramount.
-The writer is managing partner, BellWether Advisors LLP