The stock market is reviving and there are predictions that the market may once again climb back to the magic 6000 level. But, many investors burnt their fingers in May when the market crashed and they won't return to the market in a hurry.
In such a situation, what should you do? Should you invest in mutual funds? If so, should invest in equity, debt or floating funds?
Your investment portfolio depends upon four things -- your age, risk appetite, the time horizon for which you are willing to stay invested and your financial goals.
Assuming that you have made all other investments relating to tax planning and the like, and have spare cash, which you wish to invest in mutual funds, what should you do? Remember, most financial advisors recommend that exposure to the market should not be more than 30 per cent to 35 per cent of your total asset allocation.
Let's look at a few different situations:
Situation 1: A young aggressive investor with a high-risk appetite who is willing to stay invested for the long run -- that is, he is willing to accept the ups and downs of the market for at least 10 years. Some financial consultants recommend the systematic investment plan for mutual funds.
And if the young investor wants to make a one-time investment, then he or she could invest up to 70 per cent in equity mutual funds and the remaining 30 per in debt funds.
"In the long run both equity and debt end up giving positive returns," says Anil Kumar Chopra, CEO, Bajaj Capital. During the last six months, annualised returns from debt funds have been mostly negative, but annualised returns over the last five years have been between 8 per cent and 12 per cent.
Situation 2: A young investor with a high risk appetite but who can invest only for the short run -- that is he or she needs the money within a year or so, should invest 50 per cent in floating rate funds and 50 per cent in equity. The last six-month annualised returns from floating rate funds have been between 4.5 per cent and 4.7 per cent.
Situation 3: An investor with a low risk appetite and who needs the money in the short run, should invest 50 per cent in floating funds and 50 per cent in liquid or cash funds. During the last six months annualised returns from cash or liquid funds have been around 2.5 per cent but over the past year, the returns have been between 4.5 per cent and 4.8 per cent.
Situation 4: A young investor with a low risk appetite looking at being invested for the long run, should invest 100 per cent in debt funds. "In the long run debt funds are the safest investment option as the returns are always positive. It's only in the short run, where a rise in interest rates results in negative returns from debt funds," says Chopra.
Situation 5: An older person who post-retirement wants to invest his extra funds in the market. Elderly people should be cautious about the market. They should only invest fund that are not required for any immediate need and with which they can afford to take a risk.
Even then older people shouldn't invest more than 30 per cent of their portfolio. "If an old person needs regular returns to live on, then he should not invest in mutual funds. Equity exposure should be taken only if there are spare funds," warns Chopra.
All financial consultants agree that the stock market is meant for the long-term player. Even stock market guru Warren Buffet has always said, "It's not timing the market but time in the market, which is important."
"Serious wealth creation is possible only through the stock market. However, one has to be invested for the long run and the mutual fund route is better as your money is in the hands of professionals," says Pawan Ghavri, senior manager, wealth creation services, Bajaj Capital.
Ghavri also recommends the SIP route for young investors. Irrespective of the booms and crashes of the stock market, returns are positive if one sticks it out for the long run.
"Every crash is followed by a boom which is bigger than the previous boom. So if one is constantly investing, even if it is a small sum, after a few years the returns will be remarkable," says Ghavri.
Let's take an example: 'A' invested Rs 10,000 every month starting on March 1, 2000 (at the peak of the tech boom) in the Birla India Opportunities Fund (Growth) and continued with the SIP for 52 months until July 2004.
He made a total investment of Rs 520,000. During this period he saw the NAV fall from a peak of Rs 35.12 on March 1, 2000 to Rs 6.83 on November 1, 2001 and then rise again to Rs 21.75 on May 1, 2004. On July 16, 2004, the NAV was Rs 20.91, and the value of A's investment was Rs 856,625. Despite all the ups and downs that's a profit of 64 per cent.
What would have happened if A had invested Rs 520,000 at one go on March 1, 2000? The value of his investment on July 16, 2004 would have been Rs 309,601. That would have been a loss of 40 per cent.
By investing regularly, A managed to take advantage of the ups and downs of the market.
Similarly, if A invested Rs 20 lakh (Rs 2 million) in Templeton India Income Builder Account on July 1, 1999 and from August 1, 1999 started transferring Rs 50,000 every month to Franklin India Prima Fund then on July 1, 2004, his total investment would have been worth Rs 75,13,243.
"By not timing the market and by investing regularly in mutual funds, one can be on one's way to wealth creation" concludes Ghavri. And that, really, is the bottomline.Powered by 
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