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Answers to FAQs on the current financial crisis

We have received 100s of questions from clients...here are the most common questions that might concern you as well.

1. Where is the market going, what is it going to do next?
2. Should I invest now or should I wait?
3. I want safety, are FD's the best investment option?
4. Is my insurance plan safe – I have heard that many insurers might be affected by the crisis.
5. Newsflow from US still continues to be bad – can this further negatively affect the Indian market

1. Where is the market going, what is it going to do next?

The truth is that no one knows. Don't believe the bubble heads on TV who say market will hit this level or that level – if they are such geniuses, why did they not warn you when the market was at 21,000 that the market was going to collapse.

In the short run it is very difficult to pinpoint where the market will end up, but in the long run we can say that given the fundamentals of the Indian economy and our strong 6%+ GDP growth, our markets will likely be higher than the current 10,000 levels.

Finally, we would add that the really smart investors do not worry about the direction of the market - they worry about the business prospects of the companies they invest in. The right question to ask is whether your chosen company could be a bigger business in the coming years. The wrong question to ask is "where do you think the market will go?" Like we said earlier, no one knows the answer.

What we do know is that over a 100 years of history has shown that the equity stock market is one of the best investment options for long-term capital appreciation. So, don't give up on the markets just because they are down right now.Top

2. Should I invest now or should I wait?

The most important criteria for you should be as to why are you investing – what financial goals do you want to accomplish. Accordingly decide whether to invest today or wait for a later time. If your time horizon is long, say anything more than 3-5 years, then the markets are fairly cheap right now relative to the long-term prospects of the Indian economy and you should be investing right now.

If your goal, for example, is paying for a newly born baby's education in 20 years from now, then why should you not be investing today? It makes sense to start as early as possible to take advantage of compounding of capital.

However, if your goal is to get rich quick, then you'd much rather try your hand at the casino! The stock market is not a machine using which one can earn easy money.Top

3. I want safety, are FD's the best investment option?

Remember, there is risk in every investment. Having said this, bank FDs will generally be the safest type of investment instrument one can find. However, please remember that you will have to pay taxes on the interest earned at your marginal tax rate. Also, once you are locked into an FD, you will not be able to withdraw your money without paying a penalty.

As an alternative, you might want to consider FMPs (Fixed Maturity Plans). Occasionally, these might give you higher rates than a FD. Check with your bank if they have FMPs, but please also do your diligence that the FMP is only invested in the debt of top quality and financially healthy firms.

If you are willing to take a little bit more risk, then you might also want to consider a balanced mutual fund that will provide you with the stability of a debt fund but also the potential appreciation of an equity fund.Top

4. Is my insurance plan safe – I have heard that many insurers might be affected by the crisis.

Many people are panicking that their life insurance policies might be in danger because their insurance company has been affected by the economic crisis. Crisis or no crisis, you should frequently think about whether your insurance policy is safe or not. After all, your family's financial health depends upon it. However, there is no need to panic about your insurance policy.

Many clients call us saying they are worried about their ICICI Prudential policy because ICICI Bank is rumoured to be having problems. First of all, remember that these are two separate legal entities, and that both are top quality and robust companies. You gave your insurance premium to the insurance company, and not to the banking company. Secondly, the Insurance Regulator and the Government of India are not going to let any insurance company fail in India.

Where you should be worried is if you were sold a ULIP (unit linked insurance plan) and promised that you could double your money in a short time through an investment in the stock market. This is not going to happen. Your returns will not be the same as your agent promised you. But this does not mean that the policy is unsafe. If something happens to you, your family will still receive the sum assured, but the returns might not be that high if you were looking to cash out of your ULIP.Top

5. Newsflow from US still continues to be bad – can this further negatively affect the Indian market

Bad newsflow, not just from the US but also from other countries, continues to affect sentiment around the world. As a result, we in India are also feeling pessimistic about the near future. With every new bankruptcy announcement of any foreign company, we worry even more about the future of Indian companies.

However, we should be feeling confident about the future of India because our economy is not that correlated to the US. Yes, the export market will be affected. But generally speaking, the domestic fundamentals of India are far more important for the health of our markets and companies, than what happens in the US.

The negative sentiment around the world might exist for an additional 6-12 months, but ultimately, its how strong the Indian economy is that will make a difference. And, a 6%+ GDP growth in India suggests that our economy is on a very strong wicket!Top

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