5 questions investors are asking now

At Personalfn, we routinely interact with investors. And ever since the equity markets turned volatile, we have (expectedly) come face to face with several hassled and confused investors. Another pattern we have noticed is that a number of investors have similar concerns. We thought it would be interesting to address the 5 most common questions that investors are faced with now.

Is this the right time to invest in equities?
With equity markets descending from their record highs, several investors want to know if this is the right time to invest in equities. More importantly, they would like to know if markets have bottomed out.

As regards the former, it can be safely stated that the markets are attractively poised in terms of valuations. So does that mean investors across the board should get invested in equities? Not really. Only investors who can take on the risk associated with an equity investment should consider getting invested. Also, investors should be willing to stay invested for the long haul (at least 3-5 years).

Then again, investors must honestly evaluate if they are competent enough to directly invest in equities. If not, they would be better off opting for the mutual funds route and thus bank on the expertise of the fund manager and the fund house. As for the question about markets having bottomed out, to be honest, we are not equipped to predict when that will happen. However, for serious long-term investors, we believe that is an irrelevant parameter.

Which is the best SIP?
Ever since the markets turned volatile, SIPs (systematic investment plans) have emerged as a buzzword. Advisors, financial planners and fund managers are all exhorting investors to opt for SIPs. However, in all the SIP frenzy, investors seem to have been misled into believing that the SIP is an investment avenue.

SIP is simply a mode of investing in mutual funds, which permits investors to make staggered investments rather than a lump sum one. As a result, in volatile times, investors benefit by receiving a higher number of units and thereby lowering their average purchase cost.

In the world of investments, there is no such thing as a 'best investment'; in other words, one size doesn't fit all. An investment that is right for one investor can be grossly unsuitable for another. Hence the key lies in selecting an investment that's right for the investor in question. And since there is no best investment, there is no best SIP either. Investors need to first identify mutual funds that are right for them, and then consider investing in them via the SIP route.

Should I sell off my ULIP?
When equity markets were surging northwards, apart from equities and mutual funds, ULIPs (unit linked insurance plans) were also favourites with investors. For investors, it was another opportunity to ride the rising markets; while for the insurance advisors, ULIPs offered the opportunity to garner attractive commissions. It was a win-win situation for all, until markets changed directions.

Now with the markets falling, investors are seeing the value of their ULIP investments decline with each passing day. The higher expenses charged in the initial years are only adding to the agony. Both investors and insurance advisors are responsible for this scenario. Investors, for having made ill-informed investment decisions and advisors for having mis-sold ULIPs and/or failing to adequately educate investors.

The trouble is that there is no universal answer to this question. Investors who are invested for the long haul (10-15 years or thereabouts) in a well-managed ULIP with the intention of achieving a predetermined investment objective should continue to stay invested.

However, investors who got invested for the wrong reasons or in the wrong ULIP may have to consider making an exit after consulting with their advisors. Such investors would do well to explore all available options and also study the implications of making a premature exit, before making a decision.

• Having second thoughts about your ULIP?

Are FMPs risk-free investment avenues?
The rising yields in debt markets have resulted in FMPs (fixed maturity plans) emerging as attractive investment options for investors. Also, the testing conditions in equity markets have in no small measure, contributed to the allure of FMPs.

Simply put, FMPs are debt-oriented investment avenues from the mutual funds segment with a fixed investment tenure; also, they profess to offer a reasonably assured (predetermined) return. This is achieved by locking in a yield (return) at the time of getting invested. Hence an investor who is invested in the FMP until its maturity, is virtually assured of clocking the projected return.

However, it should be understood that FMPs are not the risk-free avenues they are made out to be. For instance, the possibility of the actual return varying from the indicated return cannot be ruled out. Market conditions, inappropriate investments (say a credit default in any of the underlying investments) or even a poor investment style (a mismatch between the maturity profile of the FMP and that of its underlying investments) can be responsible for the same. In conclusion, while FMPs would qualify as low risk investment avenues, they are certainly not the risk-free avenues they are made out to be.

Is it safe to invest in company fixed deposits?
As the name suggests, company fixed deposits is a term associated with FDs issued by companies. They are distinct from the FDs offered by post-offices and banks (like nationalised banks for instance). Company FDs are known to offer attractive returns vis-a-vis FDs issued by banks and post offices.

But then the same comes at a price - higher risk. Company FDs are unsecured in nature. Hence, should a default occur, investors would find themselves in a rather unenviable situation. Of course, this doesn't mean that every company FD is likely to result in a default; all the same, the risk involved shouldn't be ignored.

Risk-averse investors who accord higher priority to safety of capital and an assured income over higher returns would do well to steer clear of company FDs, especially the ones that don't carry an 'FAAA'/equivalent credit rating indicating the highest degree of safety. For such investors fixed deposits from post-offices and nationalised banks may be more suitable.