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'Be prepared for positive surprises' is the lesson A Balasubramanian, chief executive officer, Birla SunLife Mutual Fund, wants investors to learn from 2014. And, for good reason. It's seldom that most retail investors, whether in debt or equity, have ended a year with a smile.
Whether risk-averse, risk-neutral or a risk taker, making money wasn't tough unless you had only gold in your portfolio or dabbled in global market funds indiscriminately. Except gold funds which returned a negative 6.1 per cent, all other funds, whether debt or equity, gave positive returns for the first time in five years. The best part is that even in terms of real rate of return - adjusted for the consumer price index - things were really good. Except international funds and gold funds, all other schemes beat the average rate of consumer inflation of 7.4 per cent in 2014.
Stocks
Equities, especially mid-caps and small-caps, were the toast of the market. The BSE small-cap index was the top gainer at 66 per cent; the mid-cap index rose 51 per cent. The key benchmark indices, Sensex (on the BSE) and Nifty (on the National Stock Exchange), rose 29 and 30 per cent, respectively. What is interesting is that these gains were despite a 2,000-point or eight per cent loss in 13 trading sessions between November 28 and December 17.
While mutual funds (MFs) followed the broad trend in the stock market, there were some exceptional performers and, as usual, wide differences in performance in the mid-cap and small-cap segments. Sundaram SMILE Fund returned the best in the mid-and-small cap category, with returns of 106 per cent. Similarly, SBI small-and-mid-cap and DSP BlackRock Microcap fund more than doubled your investment. At least 25 schemes, however, returned well below the category average of 72 per cent. And, a couple returned 38-42 per cent - way below the category average.
Similarly in the large-and-mid-cap category, Birla SunLife Special Situation Fund returned the best at 61 per cent, a good 17 per cent over and above the category average of 44 per cent. In the large-cap category, the L&T equity plan returned the best with 49 per cent vis-a-vis the category average of 34 per cent.
The lesson: Choose the right scheme, especially in the mid-cap and small-cap segment. For, the right scheme can make serious money, whereas the wrong one, in a bad year, can lead to serious losses.
Amisha Vora, joint managing director, Prabhudas Lilladher, says investors will benefit if they continue to remain invested, preferably through the MF route.
The surprise was debt. While medium and long-term gilt returns were exceptional at 17 per cent, the highest amid debt funds, other debt schemes did not do too badly. All other categories gave returns of eight to 16 per cent, higher than the consumer price index. Even employee provident fund and public provident fund beat the consumer price index in 2014, with returns of 8.75 per cent and 8.7 per cent, respectively. "Given that there are expectations of a rate cut in 2015, debt funds will continue to do well," says Rahul Goswami, chief investment officer, fixed income, ICICI Prudential MF. Interest rates and bond prices are inversely proportional; when one rises, the other falls.
The lesson: To get best advantage of debt funds, buy longer-duration funds, which benefit from rate cuts. Also, hold it for three years at least because under the new tax rules, you will be taxed at the individual slab rate (detrimental if in the tax bracket of 20 per cent and 30 per cent plus education cess), if you withdraw before three years. Whereas, after three years, you will be taxed at 20 per cent but get the inflation indexation benefit - a substantial one in times of high inflation.
Gold
Gold continued its bad run. In India, the yellow metal is down a little over 20 per cent from its peak over a year earlier. Globally, prices are down nearly 40 per cent in three years. The worst performer as an asset class this year, its performance turned slightly better last month, when it gave a positive return of 0.26 per cent. But, this was primarily because the rupee fell, due to outflows from foreign institutional investors. Experts aren't gung ho about its prospects in the near future as well, for they believe there isn't a strong case for the yellow metal.
For one, with the sharp fall in crude oil prices, the consumer price index is and going to be positively impacted. This obviates the need for having a hedge against inflation, the main argument for holding gold. "Gold is a hedge against currency depreciation and global inflation. Both are no longer a concern," Shankar of Motilal Oswal.
Also, the outlook isn't very great because as the US economy improves, there are little chances of an improvement in gold's fortunes. "As a trend, we expect the rupee to depreciate five to seven per cent against the dollar. But this won't have any effect on gold. As of now, there is no trend that shows any growth in gold prices," adds Vora.
The lesson: Have limited exposure, of five to 10 per cent, in the yellow metal. With both equities and debt markets doing well, there is little reason to raise this.
Property
The story of the real estate market hasn't improved in recent years. There were expectations that sales would improve this festive season but this didn't happen. Data from National Housing Bank shows average prices in Mumbai have risen five per cent. In the Delhi-National Capital Region, it was down by 1.5 per cent year-on-year in the June quarter. However, since these are average prices of a city, there would be areas where these would have gone up and others where these would have sharply fallen.
Most experts feel the prices are unlikely to go up sharply in the coming months or even a year. "The current year is one of the worst for the real estate sector. This is the third year of falling sales and piling of inventory, while consumers continued to stay away. Barring a select few, all developers are facing financial issues. We don't think there will be change in housing prices the next financial year. If interest rates drop, end-users might start buying but investors will stay away, as prices are not expected to start climbing any time soon," says Gulam Zia, executive director, Knight Frank.
According to a recent report from UBS Securities, pre-sales of top developers are down 50 per cent year-on-year in 2014, pushing housing inventory to a seven-year high. No wonder, innovative schemes such as 20:80 and 25:75 are making a comeback.
The lesson: Scout for a house. When interest rates start coming down, it might work in your favour. If an investor, wait for more time. Also, with the Securities and Exchange Board of India introducing Real Estate Investment Trusts this year, investors can look at this route once the tax issues are resolved.
Ahead
Experts believe 2015 is more likely to be one of consolidation for the stock market. The returns will not be as spectacular. However, as Balasubramian says, we are always saving or working towards managing a crisis. No wonder, investors keep on exiting a falling market and investing in a rising one. If you stay invested in a disciplined manner, there will be positive surprises like 2014.
