Markets are getting rough and till there is clarity on fund flows, which are dependent on a variety of factors, a sense of uncertainty is expected to prevail. There is a great deal of uncertainty across the geo-political landscape: US Federal Reserve has indicated a tightening of interest rates is on the cards; US President Donald Trump has proposed a new tax plan, but like with many other proposals he doesn’t seem to have even all his party members backing it; Shinzo Abe has called for polls in Japan; Angela Merkel has just scraped back to power in Germany; North Korea’s Kim Jong Un seems unfazed by US pressure and might let loose a few missiles; India is struggling with low job creation and poor growth, leading for the first time to significant open criticism of Prime Minister, Narendra Modi.
All of the above and several other global economic developments and factors can impact the flow of funds to the markets. For one, an increase in interest rates in the US can lead to some pull-back of funds from emerging markets. In the case of Indian private capital, with few signals of a change in sentiment, it is unlikely that any pick-up in real investment will lead to a significant fund outflow from the markets in the short-term. And the lack of a significant pick-up in investments will also likely keep the demand for credit subdued and interest rates in check.
Given the above scenario, despite the several uncertainties, it makes sense to look at drip investing in balanced funds to protect your downside while leaving enough room open for an upside. Drip investing involves investing sums at regular intervals to ensure you don’t get caught on the wrong side of the markets and take the benefit of rupee-cost averaging to limit the downside of your investments. The Systematic Investment Plans (SIPs) offered by mutual funds adopt this principle to help individuals better protect their investments.
The debt component in a balanced fund will ensure a margin of safety and a certain minimum return, while the higher-risk equity portfolio, while causing some concerns in a rough market, holds out a promise of healthy returns when the market trend turns favourable.
Given that the long-term outlook for the Indian economy remains promising, if you are investing with the right time-frame for equities of about 3-5 years, there is little to worry and much to gain from staying invested and putting some more money in by adopting the drip investing practice.
Don’t let the uncertainty in the markets fluster you. With a balanced approach and by staying the course you can reap good benefits.