The whole world is waiting with bated breath for the Federal Reserve (Fed) to announce its next move today on reduction in its bond buying program or the much hyped and dreaded Fed taper, as it has come to be commonly known among the investing community in the recent past. For those who are not aware, here is a brief explanation of what the term “Fed taper” actually means.
Post the great recession of 2008-2009, the Fed has been infusing liquidity in to the system by buying bonds to stimulate the economy and keep interest rates low. It is currently purchasing bonds and mortgage-backed securities to the extent of USD 85 million every month. But as the economy improves, Fed has to slow down/reduce or “taper” the rate at which it buys these bonds. And the point at which it starts doing so and pulls back from its monthly USD 85 million worth of purchases will signal the start of the Fed taper.
One of the greatest fears of the stock market investors and those who have equity investments is that this tapering could result in a rise in interest rates in the economy and adversely affect the stock markets in the days to come and erode their net worth.
It is still not clear when this taper would actually start- with people’s predictions varying from this month, December 2013 to the first quarter of 2014 to the second half of 2014. While the actual impact of this on the stock markets remains to be seen, as an investor with significant exposure to equities by way of stocks or equity mutual funds, here is what you can do-
- Whether the markets gets affected or not, the importance of booking profits timely cannot be over emphasized. So, if you have a portfolio of stocks – book profits in those which have appreciated significantly and your profit target is more or less reached. If some stocks are recently bought and have good fundamentals, hold on. Equities need time to grow and should be held for the long term.
- For those holding equity mutual funds, the same rule applies. If you are in deep profit, redeem. If the holding period is more than a year, the profits are not subject to any tax too. The SIP investors should continue to invest. Systematic investment plans work on the rupee cost averaging concept, and it is in times like these that they stand out- by ensuring that one invests in a disciplined manner every month irrespective of the direction the market moves, the volatility associated with equity investing is greatly reduced.
Another area which could get impacted is real estate as the taper could result in higher loan rates. And the beneficiaries could be the pensioners or the retirees who depend on interest income from fixed income investments.