There have been many dissections of this event with market experts equally divided over whether this is a bull market correction or the onset of a bear market. However, rather than getting into such arguments, I would prefer to look ahead and chalk out a course of action. Here are a few tips on what not to do.
Do not run away from reality
Denial of an event will not help you. Face up squarely to the fact that your wealth has eroded. At the same time, do not sell everything in a panic. This is a great time to revisit your portfolio and juggle it to suit the changed economic scenario.
Do not expect help from experts
All such experts have a stock statement that though the markets will remain volatile, the long term picture looks good. However, beyond this vague assurance you may not get much from them. Hence, you may not lose much by merely shutting yourself off from those channels.
Do not discontinue your SIPs
The main benefit derived from undertaking an SIP is "cost averaging". This automatically means that you have to stick with the SIP through good and bad times.
Corrective phases are the ones, which actually reduce your cost of holding, as the same amount of investment will help you obtain more units. Hence, do not let this correction dishearten you so much that you discontinue your SIPs. Some tips on fund selection are contained later.
Do not average randomly
The fact that the stocks in our portfolio have lost value, coupled with a stubborn belief that our stock selection decisions are correct, often motivate us to buy more of the same at lower prices. However, every stock that we hold may not be worth averaging. Many a time it is better to cut your losses rather than throw good money after bad.
Here are some things that you can do.
Move away from interest rate sensitive stocks
This current correction has mainly come about owing to the fear of inflation and rising interest rates. Hence, stay away from stocks in sectors such as real estate and automobiles. These are negatively correlated with the interest rate cycle and may, therefore, underperform over the next 12 to 18 months
Banking stocks too have traditionally been clubbed in this segment. However, banks that have increased the proportion of fee-based activities over the past few years could be considered as good purchase candidates somewhere around the current rates.
However, stay away from banks, which have a heavy exposure to the housing sector (either through loans to builders or consumers) as the percentage of non-performing assets in this sector may increase dramatically in the near future.
Move into stocks with low gearing
This is a corollary to the above point. Companies which do not have a high debt burden will automatically not be affected by rising rates. Certain FMCG (HLL, Britannia, VST Industries) and MNC pharmaceutical companies (Wyeth Labs, Glaxo Smithkline Pharma) fit this bill and should be seriously considered. Also, these stocks have heavily underperformed the market recently, and maybe this is the right time to get into them.
Have a re-look at your mutual fund portfolio
The past three years have belonged to aggressive funds in the infrastructure and commodities space. However, the changing global scenario will mean that caution may take precedence over aggression.
This is a good time to look at value-oriented funds such as Templeton India Growth Fund, which have a good long term track record but which have underperformed recently mainly due to its fairly defensive portfolio.
Opt for funds with a track record of at least five years (because they would have seen both good and bad times) and those, which have not experienced a lot of fund manager churn. Everyone does well in good times, but the oncoming slowdown will separate the men from the boys. Steer clear of new fund offerings and close ended funds, which curtail your liquidity.
Of course, just as we should rebalance the constituents of our equity portfolio, this is also a good time to increase the proportion of debt investments in our portfolio through the addition of bank fixed deposits, fixed maturity plans among others.
Let me end by saying that while this free-fall will be arrested soon, do not expect markets to rally as powerfully as they did, after the May-June 2006 correction.
New highs in the indices may not be made for quite some time. 2007 may well be the "Year of the Hangover" after a great party, which lasted for four years.
The writer is vice-president, Parag Parikh Financial Advisory Services.