DURING the past six months, the financial and economic scenario has undergone a sea change due to high inflation of nearly 12%, softening property prices after reaching astronomically high levels, reduction in gross domestic product (GDP) forecasts and consequent slower growth rate of the economy, political uncertainty, sub-prime financial crisis and slowdown in the US. In view of the above, let us review what investment strategies one can adopt.
STOCKS
The stock market is a reflection of psychology as well as earnings, dividends and asset value. The BSE Sensex is currently at 15,000 level, implying a price to-earnings (P/E) ratio of about 18 (with EPS of say Rs 850) and an earnings yield of nearly 6%. So, is this the time to buy, hold or sell stocks?
This is definitely a difficult question to answer as no one can accurately predict the future direction of stock markets. Historically, a P/E ratio of 15 for the stock market is considered fair, implying a BSE Sensex of 12,750. Although, the economy is currently expected to grow at 8% and the corporate sector is showing strong developments and profits, although it is showing some weakening trends now. Hence, an investor should start gradually investing at/ from BSE Sensex 12,750 to 15,000 level from a long-term perspective.
As for the promising sectors to invest in, retail, diversified financials, real estate, healthcare services, capital goods and telecom can offer good returns over the long-term. In India, over the last 10 years, growth stocks have outperformed value stocks, which have generated returns of 15% and 13%, respectively. Thus, a long-term investor should focus on growth stocks in the above sector.
DEBT SECURITIES
The bond yield on 1-year, 5-year and 10-year government securities (G-secs) is currently approximately 9.46%, 9.42% and 9.41%, respectively, and on 5-year corporate bond (AAA rating), it is 10.80%.
The Reserve Bank of India (RBI) first quarter review of Annual Policy for 2008-2009 on July 29, 2008 made the following changes:
• Repo rate (the rate at which banks borrow funds from RBI) is increased by 50 basis points (bps) i.e. 0.50% with immediate effect — thus, borrowing cost of banks will rise and effectively, interest rates charged by banks have/will also increase.
• Cash reserve ratio (CRR) — the amount of funds that the banks have to keep with RBI — will be hiked by 25 bps with effect from August 30, 2008 — in effect the amount available with banks will come down as it will drain out the excessive money from the banks.
• Bank rate (rate at which banks lend money) and reverse repo rate (the rate at which banks park surplus funds with RBI) are unchanged at 6%.
Due to the inverse relationship between bond prices and interest rates, the current trend of rising interest rates have brought down the prices of bonds and consequently, the gain thereon. On account of this, the returns on medium-long-term debt funds, including MIP, have been very low over the last year.
Thus, it is advisable for investors to maintain/ invest in lower portfolio durations to minimise the impact of rate increases. In effect, investors should invest in short-term products — directly in G-secs or through mutual funds in debt mutual funds, especially fixed maturity plans.
Although banks are offering high rate of interest on fixed deposits, debt funds are most tax-efficient for investment since interest on fixed deposits are taxable at the regular rate of tax ranging from 10.30% to 33.99% while dividend on debt funds is tax-free (however the debt fund would be liable to pay tax on distributed income ranging from 14.1625% to 28.325%, depending upon the type of holder and type of debt funds) and long-term capital gain (holding period of more than 12 months) is taxable at the rate of 10% (without indexation) or 20% (with indexation).
Therefore, for an investor falling in the highest tax bracket of 33.99% planning to park funds in debt funds, for short-term investment (holding period not exceeding 1 year) dividend option and for long-term investment (holding period exceeding 1 year) growth option would be more tax-efficient.
GOLD
Gold has appreciated by a whopping 35% over the last 1 year. In the long term, gold prices are expected to increase but not at double digit figures year over year. In the past month and in short term, gold prices have and can still marginally come down respectively.
Thus, investors should stay away from precious metals like gold and silver.
IMMOVABLE PROPERTY
Property prices in India have softened in the recent 3-6 months and could get cheaper in the near term. Thus, it may be a good idea to buy prime property (commercial or residential) from a long-term perspective after carefully analysis as immovable property is not very liquid.
STOCKS
The stock market is a reflection of psychology as well as earnings, dividends and asset value. The BSE Sensex is currently at 15,000 level, implying a price to-earnings (P/E) ratio of about 18 (with EPS of say Rs 850) and an earnings yield of nearly 6%. So, is this the time to buy, hold or sell stocks?
This is definitely a difficult question to answer as no one can accurately predict the future direction of stock markets. Historically, a P/E ratio of 15 for the stock market is considered fair, implying a BSE Sensex of 12,750. Although, the economy is currently expected to grow at 8% and the corporate sector is showing strong developments and profits, although it is showing some weakening trends now. Hence, an investor should start gradually investing at/ from BSE Sensex 12,750 to 15,000 level from a long-term perspective.
As for the promising sectors to invest in, retail, diversified financials, real estate, healthcare services, capital goods and telecom can offer good returns over the long-term. In India, over the last 10 years, growth stocks have outperformed value stocks, which have generated returns of 15% and 13%, respectively. Thus, a long-term investor should focus on growth stocks in the above sector.
DEBT SECURITIES
The bond yield on 1-year, 5-year and 10-year government securities (G-secs) is currently approximately 9.46%, 9.42% and 9.41%, respectively, and on 5-year corporate bond (AAA rating), it is 10.80%.
The Reserve Bank of India (RBI) first quarter review of Annual Policy for 2008-2009 on July 29, 2008 made the following changes:
• Repo rate (the rate at which banks borrow funds from RBI) is increased by 50 basis points (bps) i.e. 0.50% with immediate effect — thus, borrowing cost of banks will rise and effectively, interest rates charged by banks have/will also increase.
• Cash reserve ratio (CRR) — the amount of funds that the banks have to keep with RBI — will be hiked by 25 bps with effect from August 30, 2008 — in effect the amount available with banks will come down as it will drain out the excessive money from the banks.
• Bank rate (rate at which banks lend money) and reverse repo rate (the rate at which banks park surplus funds with RBI) are unchanged at 6%.
Due to the inverse relationship between bond prices and interest rates, the current trend of rising interest rates have brought down the prices of bonds and consequently, the gain thereon. On account of this, the returns on medium-long-term debt funds, including MIP, have been very low over the last year.
Thus, it is advisable for investors to maintain/ invest in lower portfolio durations to minimise the impact of rate increases. In effect, investors should invest in short-term products — directly in G-secs or through mutual funds in debt mutual funds, especially fixed maturity plans.
Although banks are offering high rate of interest on fixed deposits, debt funds are most tax-efficient for investment since interest on fixed deposits are taxable at the regular rate of tax ranging from 10.30% to 33.99% while dividend on debt funds is tax-free (however the debt fund would be liable to pay tax on distributed income ranging from 14.1625% to 28.325%, depending upon the type of holder and type of debt funds) and long-term capital gain (holding period of more than 12 months) is taxable at the rate of 10% (without indexation) or 20% (with indexation).
Therefore, for an investor falling in the highest tax bracket of 33.99% planning to park funds in debt funds, for short-term investment (holding period not exceeding 1 year) dividend option and for long-term investment (holding period exceeding 1 year) growth option would be more tax-efficient.
GOLD
Gold has appreciated by a whopping 35% over the last 1 year. In the long term, gold prices are expected to increase but not at double digit figures year over year. In the past month and in short term, gold prices have and can still marginally come down respectively.
Thus, investors should stay away from precious metals like gold and silver.
IMMOVABLE PROPERTY
Property prices in India have softened in the recent 3-6 months and could get cheaper in the near term. Thus, it may be a good idea to buy prime property (commercial or residential) from a long-term perspective after carefully analysis as immovable property is not very liquid.
