Explained: Why investments need to be based on liquidity, asset allocation and cash flow needs

By: |
New Delhi | Published: April 10, 2018 1:13:44 AM

In the first quarter of 2018, the Indian equity market underperformed its peers and the global markets. And if you had started investing in the last 3-6 months, then your portfolio may be in red.

investment, cash flow, economy, moneyInvestments have to be based on the asset allocation, liquidity and cash flow needs.

In the first quarter of 2018, the Indian equity market underperformed its peers and the global markets. And if you had started investing in the last 3-6 months, then your portfolio may be in red.

On the other hand, 2017 was an exceptional year and the BSE Sensex delivered more than 27% annualised return. In 2016, the returns were less than 2% and in 2015, it was negative 5%. The annualised returns of the past three years was 8%.

Period of investments

That’s why it becomes very important that when you start investing, you know for what period you are going to invest. If your investment period is less than 3-5 years, equity as an asset class should not be overweight, if you want liquidity or have cashflow needs. And the sweet spot is there. What happens is that as investors, we confuse ‘activity’ for action. We need to ingrain into our DNA and mindset, that ‘inactivity’ is also an ‘action’, as long as you know why you are being ‘inactive’.

You need to understand that you have to and stay the course. There has to be a method in the madness. If you have invested in the beginning of 2018 in a large-cap mutual fund, the three-month return is negative over 8.5%.

If you had invested in late 2007 in a large-cap mutual fund, the returns were negative: one-month (-15.24%), three-month (-23.33%), six-month (-34.20%) and one-year (-47.88%). What it means is that even after holding for a year, `1 lakh invested had a value of little over of `52,000, a paper loss of `48,000. And if you had stayed put till date, the same `1 lakh has delivered an annualised return of over 10%, with value at `2.66 lakh.

Let’s understand this journey. `1 lakh invested in a year saw the value dropping to `52,000 and grow to `2.66 lakh—over five times from the lows. Stay the course, if the identified mutual fund scheme and stock has a growth potential and the prices are beaten down only on account of the prevailing environment. History is a great teacher. Irony is that many of us do not look at it and do not learn from it.

Similarly, if you had invested `1 lakh in April 2015 in a large-cap mutual fund, the returns were: one month (-4.28%), three month (-4.43%), six month (-7.40%) and 1-year (-17.55%). And today, the corpus is around Rs 1.25 lakh (return of over 7.6% ), even after the dip in returns in the first quarter of 2018.

And in mid-cap funds, which has been beaten down, if you had invested in the similar time period of 2007 and 2015, the annualied returns have been 15%. But do understand, the volatility and standard deviation is higher. So, when the market falls, the returns fall down more as compared to a large cap.

The approach to follow

Investments have to be based on the asset allocation, liquidity and cash flow needs. Also, should SIP be continued, or stopped? This question comes, when the markets are going down. Why does this question not come when the markets are going up? That’s because the brain is hard wired. We want to see what is good. Always remember that SIPs need to be mapped based on the time-horizon. If the horizon is less than 3-5 years, invest in debt funds SIP. And for a greater time horizon, equity beckons you.

The writer is founder and managing partner, BellWether Advisors LLP

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Mutual Fund Investment: What should be your MF strategy for 2018-19?
2Looking to buy house in Delhi NCR? Builders say property prices may rise in FY19
3How SBI debit cardholders can avail cashback offer at Amazon sale