Too many investment options may leave you confused. This article helps you zero in on the most suitable bundle for your portfolio
IT IS that time of the year again when people start making New Year's resolutions and also sketch out their investment strategies for the year ahead, keeping their return expectations and risk appetite in mind. After all, well begun is half done, as it is generally believed. The problem, however, is that a majority of investors are still reeling under the impact of economic meltdown and are more or less confused with even the traditional modes of investment either not doing well or giving erratic returns.
In normal times, for instance, real estate provides steady returns, unaffected by volatile movements in the stock market. But currently the housing market is groaning under the weight of a huge backlog of unsold homes, rising interest rates and an uncertain future. Similar is the case with the stock market whose high volatility has been scaring common investors away for quite some time. So what should the investors do in such a scenario? Should they still wait for the right opportunities to emerge or should they put their money to work where some opportunities are visible?
No need to mention that it all depends on an individual investor's goal, priority and risk appetite. Financial experts, however, believe that although finding out the best bet or a sure thing might not be possible in these uncertain times, the overall situation is still not as bad as it is made out to be. A majority of them, for instance, are still quite bullish on the stock market, given its past performance and the future outlook. Equity as an asset class has delivered returns in excess of 15% CAGR over the last 20 years and is expected to deliver 15-17% returns over the next 5-10 years, based on earnings growth and dividend yield. Investors should, therefore, take a long-term view and stick to equities for generating real returns to beat inflation.
Just because the market is near its all-time high, it doesn't mean that the pond has entirely been fished out. It only means that we need to search carefully and meticulously for those 'value picks'.
The picture becomes clearer when one looks at the stocks that have participated in the rally and the ones that have not. India is moving towards a 9% GDP growth and consumption levels are on the higher side which would help support higher valuations. As far as stock markets investments and returns are concerned, it is difficult to time the markets and decisions need to be made with longer-time horizons unless one is a trader. One thing, however, is clear that in the long run, stock market returns (as evidenced by the Sensex or Nifty) would generally beat inflation and other modes of investment.
But how should investors dabble in the stock market? One of the safest ways to take exposure to equities is through exchange-traded funds (ETFs) which provide returns in line with the indices and are a good way to do passive investing. Investing through a systematic investment plan (SIP) is also a good idea, and if an investor is looking at a direct equity portfolio, one can create a basket of five or six stocks of one's choice and go on investing in them every month or at some fixed interval. Ultimately, with the concept of averaging, the returns will show up.
Gold is another asset class which is likely to give good returns in future. Even though gold has been
scaling new highs in the recent past of over $1400 an ounce, the yellow metal—generally regarded as the best hedge against inflation—will continue to find support as long as there is uncertainty in the global markets. However, here too gold ETFs would be one of the best ways to take exposure to them.
On the debt side, there will be opportunities as interest rates move upwards from the low levels of 2008 and 2009. Initially, it makes sense to put money into funds with investments in short duration paper and later on shift to longer-term maturity paper. With inflation being high, interest rates too are attractive. So locking into 7-year, 10-year or 15-year bonds at attractive rates should also be high on your list. If a family member is in a lower tax bracket, consider investing into these bonds in their name to improve your post-tax returns. Make sure that the bonds are highly rated, AA+ or AAA, or then government guaranteed.
The flurry of infrastructure bonds offered by Indian companies with added tax breaks also make for a decent investment. With a lock-in period of five years and after tax yields of double digits, these bonds should not only beat inflation, but offer stability in one's portfolio as a debt component.
From a short-term perspective in fixed income, investors may take exposure to FMPs to play short end of the curve and Nabard for the long-end of the curve. FMPs are yielding 8.5-9% and are the safest bet in a rising interest rate environment.
Crude oil is also an investment that is worth taking a look. The 'black gold' touched a high of $89.76 a barrel on December 6, 2010, on NYMEX, a level not seen since October 2008. Highly correlated to economic growth, the fate of crude oil hinges on the global economic growth. If the threat of double-dip is taken out of equation, the fast expanding Asian economies and even a modest growth in European and the US economies will take crude oil to the three digit mark and beyond.
During this time, also make sure that your asset allocation includes an appropriate exposure to different countries, currencies and asset classes. Commodities should be part of your portfolio and these are best invested in internationally—some advisers do have tieups with international platforms for this opportunity under the Liberalised Remittance Scheme. To mitigate the loss due to currency appreciation (of the rupee vs most developed economies), these products could come with a gold overlay as well.
There are also some mutual funds launched in India which invest outside India, mostly in developed markets' Fund of Funds. In the longer run, commodities and natural resources are always going to perform well with shortages and the demand-supply mechanics of the ever-changing world. There are some funds available in this segment which are investing outside India and could be the part of one's portfolio.
Currently, blue chip equities in developed markets like the US are also reasonably valued. Munot says while he has a very cautious view on growth prospects in those economies for an extended period, given the liquidity conditions, healthy shape of corporate balance sheets and valuations, one can look at large cap equities in developed market from diversification point of view.
Thus, even in these uncertain times there are lots of opportunities available in the market. However, to succeed as an investor, you need to diversify across different asset classes to keep your risk moderate. And more importantly, it is the right asset allocation which should be given the highest importance as that will ultimately decide returns over the long run.
SUCCESS FORMULA
• Don't get confused with all the noise.
• Clearly break up funds in compartments, based on time horizons for which you wish to invest.
• Identify the right opportunities keeping your risk appetite & return expectations in mind
• Diversify across different asset classes to keep your risk moderate
• Give priority to right asset allocation as that decides returns over the long run
