How to protect capital 038; maximise returns in turbulent times

It doesnt happen very often that all major asset classes deliver negative returns in a particular period.

It doesnt happen very often that all major asset classes deliver negative returns in a particular period. June 2013 will go down as one such month when equity,debt and gold all gave negative returns,unsettling a majority of investors and experts.

How could this ever happen? We are living in interesting times and India is not insulated from actions of major economies of the world. The free fall of rupee against dollar and the resultant sell-off in the debt market by foreign investors have hit local investors hard. In such a scenario,how do you protect your capital and maximise your wealth? This is the time for getting your investment act together.

The approach

Appropriate asset allocation holds the key to wealth maximisation. But in scenarios where all asset classes returns are in red,is it time to revisit your investment strategy? The rupees depreciation has put on hold interest rate cuts by the Reserve Bank of India RBI,making shorter term-yield stable and more attractive. As an investor,what should be your approach then?

Do not mix your long-term and short-term fund requirements. If the corpus is to be invested for a period in excess of a year and above,short-term funds will ensure that the returns are stable with little volatility. However,if and when rate cuts happen,the reinvestment risk of your short-term funds which were actually long-term investments will ensure that you will get a suboptimal return. Missing the forest for trees is a possibility if you get the time horizon wrong.

So,clarity on time horizon is paramount while investing in debt funds. Again investing in long-term debt fund looking at the past performance is not recommended. Income funds,bond funds and gilt funds have delivered annualised returns in excess of 12 over the last 12 months. In fact,some gilt and income funds have delivered in excess of even 15.

The carnage in June did take some shine off the returns and if you have invested between May 16 and June 20,2013,the one-month returns in longer duration debt funds are in red.

Typically ,you would not associate debt funds with negative returns. But if the yield cycle corrects against the expected yield movement,the impact has to be borne by all. Staying invested through the time horizon is the answer. Foreign institutional investors FIIs are major players in the Indian debt market and the negative returns in June was primarily because of the flight of the capital.

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Liquid funds and ultra short-term funds are recommended investment options if the time horizon is less than a year. For anything above a year,income funds and bond funds are recommended. You need to brace for volatility in long-term funds. And,typically,if the investment is held through the time horizon,returns in excess of bank fixed deposit rates in 2013-14 can be expected.

With the US Federal Reserve looking forward to stem the flow of easy money and other world economies still in the recovery mode,yield movements are difficult to anticipate. It is more and more clear that the Indian economy is no longer insulated and the flight of capital could create havoc,at least in the short term,for your portfolio. So,getting the asset allocation and time horizon in line with your requirements is the right approach.

The writer is founder and managing partner of Zeus WealthWays LLP