Publication: Business Standard Mumbai; Date: 6 April, 2008; Section: Investing
INVESTING: Short-term money should not be in equity as you never know when the tide turns.
Rakesh Mehta, a businessman in his late fifties, is surrounded by brokers, agents, banks and portfolio managers all the time. In the last few years, he devotes more time to stock market than his business. And why not, his portfolio has consistently returned a massive 60 per cent gain in the past few years.
Besides the regular churning of the portfolio, he has moved all the surplus money into equities to maximise returns. A cause for fear surely but his confidence stems from the fact that he has not been let down yet. Rejigging the stocks also meant that the period he remains invested has come down to just three to six months.
He believes in quick profit-booking. Of course, a bull markets offers such opportunities. However, to assume that it is a great strategy in the long term is not something that Mehta should have done.
But he learned his lesson the tough way. Mehta received a business capital that he was required to pay back six months. And he committed the cardinal sin of using the money to speculate in the stocks.
About 96 per cent of his portfolio was already in equities (with 130 stocks, several PMS and 50 mutual fund schemes). He needed more of debt. But his constant response to any advice, “I can easily make over 20 per cent from equities” turned away all the friendly advisors.
In a massive bull run many investors start believing that money-making is an easy process. Though such high returns can be excepted for a brief period, it does not mean equity as an asset class is capable of delivering 30 per cent returns at all time.
It can also deliver huge negative returns in shorter time frames as it is a volatile asset class. Hence, money required in the short term should never be parked in it.
Coming back to Mehta, after a lot of insistence from friends, he sold some of the stocks and mutual funds to park the money in debt instruments. But when the market rallied another 5 per cent, he decided to put his borrowed capital for a quick buck.
“In the next three months, I will make a quick 15 per cent and exit,” he proclaimed. That was early January 2008. His corpus today has eroded by 60 per cent.
Mehta is still lucky. There are many who entered the market at the highs and now stuck with bigger losses. Mehta, on the other hand, booked profits several times. But did not reinvest entirely into the market.
Also, he has a business that is giving him good money, in spite of the recent neglect. At present, he is hoping that there is some turnaround so that his losses can be minimised and he can repay the loans without spending any money from his pocket.
A lot of others, however, have had to go through worse. Postponement of home buying or a summer holiday is what many investors are staring at. Moral of the story: Putting serious money in stocks for short periods of time for quick speculative gains can easily go wrong.
This typically happens after sharp corrections. We are in the third month of this pain and indeed could be coming into one of the most ideal periods for long-term investments. Stocks always start to grow from lower value, when institutional investors begin to look through the pain.
As far as the Indian economy goes, advance tax numbers have been stable. If they are any indication, results of most companies should be encouraging. This is excellent for long-term investors. So what should investors do with short-term money?
Always remember: for short term goals, instead of investing in equities, you should always move money in debt a good 12-18 months before you approach the target.
Always ensure that investments must match your financial goals. Never allocate short-term money to equities and always allocate it to cash management funds, floating rate funds, fixed deposits or short-term fixed maturity plans.
The writer is director, Myfinancial Advisor
INVESTING: Short-term money should not be in equity as you never know when the tide turns.
Rakesh Mehta, a businessman in his late fifties, is surrounded by brokers, agents, banks and portfolio managers all the time. In the last few years, he devotes more time to stock market than his business. And why not, his portfolio has consistently returned a massive 60 per cent gain in the past few years.
Besides the regular churning of the portfolio, he has moved all the surplus money into equities to maximise returns. A cause for fear surely but his confidence stems from the fact that he has not been let down yet. Rejigging the stocks also meant that the period he remains invested has come down to just three to six months.
He believes in quick profit-booking. Of course, a bull markets offers such opportunities. However, to assume that it is a great strategy in the long term is not something that Mehta should have done.
But he learned his lesson the tough way. Mehta received a business capital that he was required to pay back six months. And he committed the cardinal sin of using the money to speculate in the stocks.
About 96 per cent of his portfolio was already in equities (with 130 stocks, several PMS and 50 mutual fund schemes). He needed more of debt. But his constant response to any advice, “I can easily make over 20 per cent from equities” turned away all the friendly advisors.
In a massive bull run many investors start believing that money-making is an easy process. Though such high returns can be excepted for a brief period, it does not mean equity as an asset class is capable of delivering 30 per cent returns at all time.
It can also deliver huge negative returns in shorter time frames as it is a volatile asset class. Hence, money required in the short term should never be parked in it.
Coming back to Mehta, after a lot of insistence from friends, he sold some of the stocks and mutual funds to park the money in debt instruments. But when the market rallied another 5 per cent, he decided to put his borrowed capital for a quick buck.
“In the next three months, I will make a quick 15 per cent and exit,” he proclaimed. That was early January 2008. His corpus today has eroded by 60 per cent.
Mehta is still lucky. There are many who entered the market at the highs and now stuck with bigger losses. Mehta, on the other hand, booked profits several times. But did not reinvest entirely into the market.
Also, he has a business that is giving him good money, in spite of the recent neglect. At present, he is hoping that there is some turnaround so that his losses can be minimised and he can repay the loans without spending any money from his pocket.
A lot of others, however, have had to go through worse. Postponement of home buying or a summer holiday is what many investors are staring at. Moral of the story: Putting serious money in stocks for short periods of time for quick speculative gains can easily go wrong.
This typically happens after sharp corrections. We are in the third month of this pain and indeed could be coming into one of the most ideal periods for long-term investments. Stocks always start to grow from lower value, when institutional investors begin to look through the pain.
As far as the Indian economy goes, advance tax numbers have been stable. If they are any indication, results of most companies should be encouraging. This is excellent for long-term investors. So what should investors do with short-term money?
Always remember: for short term goals, instead of investing in equities, you should always move money in debt a good 12-18 months before you approach the target.
Always ensure that investments must match your financial goals. Never allocate short-term money to equities and always allocate it to cash management funds, floating rate funds, fixed deposits or short-term fixed maturity plans.
The writer is director, Myfinancial Advisor
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