Invest cautiously in outperforming assets

Sometimes, a contrarian call can fetch better returns. But, have patience

After a gap of nearly a decade, the central government first doubled the import duty on gold from 2 per cent to 4 per cent in March 2012. And then raised it by another two per cent to 6 per cent in January this year. The main reason cited for this was ballooning gold imports which contributed the most to the Current Account Deficit (CAD), curbing which was essential.

Then, the government has also made it mandatory to declare Permanent Account Number (PAN) when purchasing jewellery above a certain threshold. That is, for payment to a dealer of Rs 5 lakh or more at any one time; or against, a bill of Rs 5 lakh or more for purchase of bullion or jewellery.
 
There was also a parallel move by the Reserve Bank of India (RBI) to encourage 'investors to undertake virtual' investment in gold through financial products linked to the price of gold like gold exchange-traded funds (ETFs). The Finance Ministry also directed gold ETFs to park a part of their gold holdings with banks and eased the terms of gold deposit schemes of banks to encourage individuals to deposit their idle gold, in the hope of raising domestic supply.

Whenever the price of any asset appreciates a lot, it attracts everyone's attention. This includes welcome attention from investors as well as unwelcome ones from income tax authorities and the government.

The latter's interests are usually aroused after a good bull run and there are some usual tell-tale signs which catalyse this interest like unusually high media coverage regarding the asset's outperformance, gold is a classic example. There is plenty of anecdotal evidence of ordinary people transformed into millionaires simply by passively investing in that asset. Manufacturers are going overboard, advertising the virtues of investing in the asset, with hints that not doing so may mean missing the chance of a lifetime. The virtuous feedback loop regarding the asset is at its most compelling point to invest in the asset class.

There two glaring examples of this phenomena are the ones discussed earlier on in this article - gold and real estate. In both these, the Indian government has levied several fresh impositions, much to the chagrin of investors. Coincidentally (or is it purposely?) both these asset classes have outperformed equities over the past decade and the level of interest in both these is at a peak.

In case of real estate investments, certain proposals announced in the recent Union Budget have been denounced as draconian and ill-considered by many. Two of these include:

• A one per cent tax deduction at source or TDS is to be subtracted by the purchaser while buying properties worth more than Rs 50 lakh
  

 

Taking the Ready Reckoner rate as the reference rate for computing the taxability of capital gain

Many states have also been steadily hiking the ready reckoner rates and stamp duty rates. The new, revised Ready Reckoner (RR) rates in Maharashtra effective from January 1 this year, have been raised by 250 to 1,000 per cent in Mumbai's western suburbs, especially the 'Borivli Zone' stretching from Goregaon to Dahisar. The market value of a flat with a built up area of 750 sq ft from the Borivli zone will now increase from Rs 1.35 crore currently to Rs 1.80 crore.

The income tax returns of several large players in the gold and real estate market have also been opened up for scrutiny by income tax authorities. Their interest is piqued on two counts:

• The source of income which leads to the procurement of such assets
• Whether the capital gains accruing from the sale of these assets have been correctly reported or not

It is subject to debate, whether the governments' actions are motivated more by the concern of redressing the macro-economic imbalances, curbing the circulation of black money or merely raising its revenues.

Often, we have seen that such moves by tax or government authorities are big contributors to the end of the rally in those assets. We are witnessing that in gold for the past few months and may see that in real estate too, over the next year or so. This is simply because these authorities often wake up only when things are overheated and their moves accelerate the shift in the cycle.

While it is virtually impossible to know precisely when any asset will attract such unwelcome attention, there are a few basic age-old safeguards that we could undertake:

Do not follow the herd: This may be easier said than done, but is not impossible. Before plunging into any asset class check out the price movement over the past three years or so. Today, such data is relatively easy to procure. If, for instance, prices have doubled or have moved parabolically in a short period of time, simply stay away. Or, invest cautiously that is, a small portion of your money.

Do not borrow to invest: Resist the urge to borrow and invest in an asset where earning super-normal returns appears beguilingly easy. It is one thing to lose your own money and quite another to lose more than the money you have.

Importantly, most investors tend to enter an assert class when it has already delivered quite a lot or is at its peak. That in itself is a risky proposition even though one can't time the market. In such a case, taking a credit to invest can add insult to injury.

Maintain a balanced asset allocation: Determine your asset portfolio based on your needs and not your greed. Give equal importance to income-bearing and growth assets in the portfolio. Rebalance the portfolio periodically,once in 3 to 6 months. Consult a financial planner, if necessary.

Be a contrarian: Usually if one asset is flying high, some other asset is hitting its nadir and is expected to perform over the next two to three years. For instance, in the current scenario, equities are a much abhorred asset class. During such times, be a braveheart and invest a small portion in that asset. Over the next three years you may be the only one smiling while the others weep.