I wish to start saving for my daughter’s wedding jewellery. I have about Rs 5 lakh. Should I start systematically investing in gold through exchange-traded funds, or put money in equity-diversified funds? What will work out as a better option if my tenure is seven years?
Gold in India has been viewed as more of a family heirloom and an asset of last resort, rather than an investment option. However, appreciation in prices in the last few years, especially after the outbreak of the global financial crisis, has helped it gain acceptance as an investment option. Gold prices always appreciate in an uncertain and anxious environment. They also tend to rise whenever there are apprehensions about the future of the US dollar, the only other widely accepted international currency. Today, both these factors hold good and, therefore, any investment in gold can be expected to deliver some appreciation.
However, will gold deliver better returns as compared to equities over your investment horizon of seven years? The vote will definitely go in favour of equities. Assuming a conservative average gross domestic product growth of seven per cent over the next seven years and applying a multiplier of 1.5 times for stock market returns (going by the past), it will be safe to assume average annual returns of at least 10.5 per cent, which is superior than several alternative liquid investment opportunities. Hence, systematically investing in well-managed equity diversified funds is a better option than gold.
Public sector units (PSUs) are said to be an area of big opportunity in stock markets for the next five years. I am keen to invest in them. Between the public issues and existing listed companies, which is a better option to look at? In the previous issues, market experts said valuations were too high.
It is true that several listed public sector businesses are available at cheaper valuations than their private peers, despite comparable or better fundamentals. Therefore, stocks of such PSUs are attractive investment bets for the long term. It will be a good idea to identify such opportunities on a case-by-case basis, both from the primary and secondary markets.
How should an investor look at valuations of new economy companies? There are initial public offers from sectors such as microfinance, port developer, water-treatment business, security services and beauty and fitness.
Easy access to capital through banks or private equity investors has encouraged entrepreneur to try their hand at non-traditional or new-age businesses. Several of these businesses tend to display high growth rates initially, but tend to wither away over a period. Reason being inadequate management bandwidth and financial indiscipline among others. Hence, it is important to look at long-term track record of the business, promoter stake, core-investor profile, quality of balance sheet, management bandwidth and valuations. Businesses, which have an attractive growth track record of more than five years, a promoter stake in excess of 50 per cent, a modest-to-low geared balance sheet and return on capital employed of 40 per cent or above, can be considered for investing up to a PE to earnings growth ratio of one time, as a broad thumb rule. It may be noted that this methodology is not sacrosanct and may need to be used in combination with other valuation methodologies.
The writer is the MD & principal portfolio manager at Capital Portfolio Advisors. Send your queries to yourmoney@bsmail.in