Two Business Standard analysts tell you there’s no time like now to fatten your wallet.
WHO SAYS THE GOOD TIMES ARE OVER?
Shobhana Subramanian
With the stock markets having come off by close to 50 per cent from their peaks in January this year, this should be a good time to buy into some blue chip counters. After all, the India growth story is far from over, so what if the economy grows at 7 per cent and not 9 per cent for a couple of years?
The case for Indian equities remains as strong as ever — India will continue to be the second-fastest growing economy in the world, after China. The fundamental story with a strong domestic market, large pool of skilled manpower and entrepreneurial talent, remains compelling.
Moreover, there are plenty of bargains — it’s almost a fire sale out there. Valuations, usually measured by what is called a price-earnings multiple, are now near their lowest levels in the last four or five years.
Remember, it’s impossible to time the market — one rarely catches either the peak or the bottom. Also, as some wise soul pointed out, “It’s not timing the market but time spent in the market that matters.”
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Equities have historically given very good returns over a three to four year period or even a longer horizon; all it takes is some patience. It’s important not to get too greedy and to be able to let go after one has made money; the trouble with most investors is that they are reluctant to sell when prices are rising.
Don’t wait for returns of 60 and 70 per cent; cash out if you’ve made even 40 per cent because no other asset class gives you that kind of return, and that too tax free — that’s if you’ve held the shares for more than a year.
For those who do not have the time to keep track of stocks, the best way to go about it is to invest in mutual funds through what is called a “Systematic Investment Plan” or SIP.
Essentially, the idea is to invest a small amount every month so that it doesn’t strain one’s finances and one gets a good price for what one’s buying. There are all kinds of mutual funds — index funds that mimic the indices, large-cap funds which invest in bigger companies, mid-cap funds that take bets on smaller firms, sector funds that look at options in different spaces such as infrastructure or pharmaceuticals.
There are also what they call balanced funds — schemes that invest some of your money in fixed-income paper and the rest in equities. You can take your pick but for starters stay with large cap diversified funds. It’s important to choose a good fund house — a glance at how they have performed over the years should give you an idea of which have been the better performing fund houses.
The other way to get an exposure to equities is to buy what are called Unit Linked Insurance Plans (ULIPs) which bring with them an insurance cover. ULIPs are pretty much the same as mutual funds though many of them are expensive in that the upfront fees are rather high.
Again, there are several combinations of debt and equity that one can choose from. Remember, equity is risky, you must be prepared to lose money, but I’d say if you’re young — below 35,or even below 40 — this is a good time to invest in the market. You could put in as much as 30 per cent of your savings into equities.
The rest can be put away in what are call fixed-income instruments such as fixed deposits (FD) with banks or Government of India bonds. They are safe and also liquid, because you can break an FD by paying a penalty, but they hardly cover you for inflation.
But interest rates appear to be topping out, so here’s a chance to lock into long-term (three year) money at 10.5-11 per cent, which will fetch you about 7 per cent, post tax. If you think you can do without the money for a longer time, say four years, you could opt for longer term deposits.
FMP today is a four letter word but fixed maturity plans have given good returns in the past. I would like to think there are responsible fund managers who would not invest the money in sub-standard paper or in paper issued by real estate firms.
Perhaps one could wait a while for the liquidity situation to improve and then buy into an FMP. The returns are better than those on fixed deposits, especially if the paper has a maturity of more than a year because there are tax benefits to be had. Again, stay with reputed fund houses.
Finally, since Dhanteras is round the corner, do buy some gold. It’s always a good investment. And if you still have money left over, go party!
TAKE ADVANTAGE OF THE MARKET
Joydeep Ghosh
Where do you invest? In these troubled times, it’s a tough question to answer. With the stock markets down almost 50 per cent in the last 10 months, investors no longer have much confidence in equities. The good news is that banks have been consistently hiking fixed deposit rates — 10-10.5 per cent for deposits of between one and two years.
And gold, whether the metal per se or exchange traded funds (ETFs), has been quite a hit. With returns of around 25 per cent from gold ETFs in the last one year, it well ought to be.
But while fixed deposits and gold ETFs look attractive, parking my entire funds in them would mean that I will have no exposure to equities. While I might be tempted to do this in the present market, when the situation changes, my returns in debt would start coming down.
Also, it would imply that I would be scrambling to move my money from debt to equity, and vice versa, every few years. Since I would be inevitably entering the stock markets when they are on the rise, my returns would come down, and substantially at times.
The only way to resolve this is by keeping things simple. Once I have exhausted my Section 80C commitments (Rs 1 lakh), which would include investments in equity-linked saving schemes, public provident fund, employee provident fund, national savings certificates, principal payout on home loans et cetera, and also taken care of my insurance needs under Section 80D, I will create a portfolio.
For starters, there should be an asset allocation that will change according to risk appetite and income. I would prefer 30 per cent in debt, 10 per cent in gold ETFs and the remaining 60 per cent in equities.
Here’s the scenario. For instance, if I have a monthly take-home of Rs 50,000 per month and cash of Rs 3 lakh in my savings account, I will immediately invest a lump sum of Rs 1.8 lakh in debt, gold ETFs and index funds. I will build the equity portfolio through four monthly systematic investment plans (SIPs) of Rs 2,500 each. The advantage: I will have cash of Rs 1.1 lakh in my savings account for emergencies.
There is further classification. In debt, there are options of short-and long-term mutual funds, fixed deposits, fixed maturity plans (FMPs) and others. In equities, there are stocks, equity diversified funds, sector funds and so on.
I would start by investing 30 per cent in debt — 20 per cent (Rs 60,000) in bank fixed deposits, 10 per cent (Rs 30,000) in FMPs of mutual funds and another 10 per cent (Rs 30,000) in gold ETFs.
By getting into fixed deposits of over one year, I would create a stable part of my debt portfolio that will give me 10-10.5 per cent returns. But since the interest earnings would come under the head of “income under other sources”, my tax payout will increase.
On the other hand, 10 per cent in FMPs (for 13-14 months) of mutual funds would give me double indexation benefits. That is, if I had invested in an FMP on 20 March, 2008 and it’s maturing in 10 May 2009, my returns will be taxed at 10 per cent (without indexation) or 20 per cent (after inflation indexation benefit of 2007-08 and 2009-10). Yes, the risk is higher in FMPs, but with returns hovering around 11-11.5 per cent, it’s worth it.
An investment of Rs 30,000, or 10 per cent, in gold ETFs will ensure that I am able to take advantage of the gold rush.
As far as equities go, Rs 60,000 or 20 per cent will go into index funds because of the nominal entry load and expenses. With the Sensex down at sub-9,000 levels, any rise will ensure that I am able to take advantage of it, even if it happens after a while.
The other two equity investments will take care of safety and aggression. I will start four SIPs (Rs 2,500 each), three in large-cap equity diversified funds and one sector fund. I would look at research data on the performance of the top 10 funds and invest for a minimum of three years.
Among sector funds, I will opt for an infrastructure fund simply because I believe that this is an important need of the Indian economy that will be addressed sooner or later. And I will invest in it for a five-year period. The sector fund will compensate for the slightly-lower returns from my index and equity-diversified funds.
