After despair in 2008, invest smartly in 2009.
The year 2008 has tested all investors. Besides a steady fall in the equity market, albeit with high volatility in some months, even other asset classes have seen a steady decline. For instance, crude oil went up to $147 per barrel and then slipped to $32 - quite a wide range. No wonder, the inflation saw a high of almost 13 per cent and now stands at 6.38 per cent.
Even real estate, which was having a great run till recently, has suddenly gone silent. Consecutive rate cuts from builders and fall in the interest rates have not helped matters to a great extent.
In some ways, debt and gold came to the rescue of investors. Especially, gold exchange-traded funds that have returned 25.5 per cent in the last one year. Fixed Maturity Plans (FMPs) of mutual funds, which were garnering a large amount of money due to better returns and tax benefits, have slowed down considerably since October.
Under this backdrop, let's look at the outlook of 2009.
EQUITIES: For starters, the immediate future does not look too bright. Despite sharp interest rate cuts in the US, the fundamentals of that economy continues to deteriorate. Even Corporate India's performance is likely to be poor in the December and March quarters. Already there are predictions that during the initial six months, we could test the October lows, when the Sensex hit the 7,700 mark.
However, there has been concerted efforts by central bankers around the globe to infuse liquidity and increase credit flow. In India, both the Reserve Bank of India (RBI) and the government has announced measures to soothe frayed nerves. All these augur well for the overall interest rate scenario. Also, there are expectations of more stimuli to the industry through incentives and interest rate cuts. All these measures imply that the domestic liquidity improves substantially.
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Also, more institutional money could enter the market from insurance companies. And even a large number of mutual funds are sitting on cash that would be invested, if things improve.
Of course, there are deterrents like bad earnings outlook and political uncertainty. But things will start improving after the first six months. Though India will outperform in economic growth in the next year, what needs to really end is the bad global news and consistent selling from the foreign institutional investors (FIIs).
Though the market is in no mood to tell anyone when the reversal will happen. Based on one's current situation, one should certainly make allocations to equity as the risk reward scenario is skewed towards potentially higher and generous rewards (to the patient ones).
For the long-term investor, buy on sharp corrections from the current levels with a clear perspective of at least five years. Don't think you will buy when the market falls further, just do it. For the ones looking to part short-term funds in equities, the answer is simply NO.
Especially now, where the outlook is rather uncertain, the best thing you can do is either invest for the long term or do not invest in equities at all.
REAL ESTATE: Not so long ago, builders would refuse any discount to the homebuyers. Things have changed dramatically since then. Due to a tight cash situation, builders are willing to sell and often, at a cash discount.
But don't jump the gun still. Although, a correction of 25 per cent has already happened, prices are likely to correct further. Depending on the area, there is an expectation that prices will come down anywhere by 10-25 per cent.
Add to that lower interest rates that will aid home buying further. However, since banks are demanding more margin money, it implies that more cash will have to be invested from one's own pocket. Not a great prospect in uncertain times.
However, unlike the equities market that move sharply on good news, the real estate market takes a longer time to do so. This means that there will be good opportunities to buy, if you can wait for a few more months.
GOLD: Gold has the potential to do well and can deliver decent returns over the next three years. However there will be volatility and you will witness days of sharp falls or sell offs. Buy gold on sharp corrections. Again, investing through ETFs could be a good idea for investors. There could be double-digit growth in returns over a three-year period.However, remember to not get over aggressive. Use 10-15 per cent of the money to invest in gold. That will make sure that you are not over exposed to a single asset class.
Income Plans (long-term bond funds): What is favouring bond funds is the fact that there has been consistent fall in the interest rate because of sharp measures by RBI.
In fact this Friday, RBI cut the cash reserve ratio by 50 points to 5 per cent, repo rate by 100 basis points to 5.5 per cent and reverse repo by 100 basis points to 4 per cent. This indicates that there could be further rate cuts by banks.
That means that long-term bond funds could be a good option. Look for funds that invest in securities with tenure of 5 years and above. Also, look at income plans, which invest in both government bonds and corporate bonds, for good returns.
The writer is director, My Financial Advisor