Idle Cash Must Be Used For Bottom Fishing In Stocks & Investing In Good Quality Govt Paper
WITH the current phase the stock market has entered into, it is the right time 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 ones that have not. India is moving towards a 9 percent GDP growth and consumption levels are on the higher side which would help support higher valuations. As far as stock market investments and returns are concerned, it is difficult to time the market and decisions need to be made with longer time horizons, unless one is a trader.
One thing is clear—in the long run, stock market returns (as evidenced by Sensex or Nifty) would generally beat inflation and other modes of investment. Investing through a systematic investment plan (SIP) is a good idea too. 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. The SIP route works very well for mutual funds too and takes away the timing element.
Equity as an asset class has delivered returns in excess of 15 percent average annual compounded returns over the last 20 years. Barring a few small recessionary years, equities have returned above average returns compared with any asset class. Investors have to allocate certain percentage to equities at any given point as long as India is growing at the current pace of growth. Whatever may happen in the short term because of global volatility, one thing is sure that a market expected to grow between 8 and 9.5 percent for the next few years and with a strong domestic consumption story, the country would be a destination for FII and FDI money for a long time. This allocation may be controlled with asset allocation models. Financial services companies with quality research services could help investors in getting right asset allocation strategies. Investors may look at new sectors such as educational services and mobile content providers which are emerging sectors with a promising future in the long term. It is possible to build a good portfolio of direct stocks (would recommend large and mid-caps) if one has access to research from brokerages or by studying the holdings of mutual funds.
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.
The other class that comes to my mind is gold. Even though gold has been making new highs in the recent past of over $1400 an ounce, the 'yellow metal' will continue to fetch support as long as there is uncertainty in the global markets. The ongoing sovereign crisis has kept the metal on a real high and there is no reason to suspect as to why gold should not tread upwards as long as countries in the Euro Zone falter. Another factor that would support gold is the dwindling faith in the USD (central banks buying lapping up gold is a testimony to this fact) and the run-away inflation in most of the Asian economies. However, since volatility is also at an all-time high, I would suggest working with strict stop losses unless one is again investing with a longer term view.
The flurry of infrastructure bonds offered by Indian companies with added tax breaks also make for a decent investment.
Having cash is also necessary. A slight shake up on the global and/or local platform can lead to an upheaval in stock markets. If such an eventuality does occur, one who has cash will be smiling all the way to the bank. Such idle cash should be utilized for bottom fishing in stocks and investing in good quality government paper lined up.
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.
From an overseas perspective, it's a matter of diversification in investors' portfolio and for that matter some allocation could be given to products, which are, supposed to deploy money outside India. There are some MFs in India, which invest outside the country and mostly in developed markets' Fund of Funds. In the longer run, commodities & natural resources are always going to perform well with shortage and demand-supply mechanics of ever changing world. There are some funds available in this segment which are investing outside India.
There are also alternate asset classes like commodity access funds available to Indian investors through the LERMS route. However, these make sense for sophisticated investors, who have access to advice as well as large surpluses. However, one needs to take into account currency appreciation or depreciation. In the long run, as the INR is expected to appreciate, any overseas investments have to ensure returns that would cover the currency risk as well.
In short, there are a lot of opportunities available in the market. It is critical to remember to invest as per the investment allocation warranted by one's situation and investment horizon.
