Take risk, but be a bit cautious

Where to invest in 2010? Stocks may give better returns than bank deposits

Take risk, but be a bit cautious


Another year is over and a new year has set in, it is time now for retail investors to focus on how best to convert their hard-earned savings to wealth for the future. Of course, it is easier said than done, especially when most researchers and analysts have already converged to a view that 2010 is going to be an ‘average to moderate’ year from the investors’ perspective — meaning nothing to get excited about.

The concerted action by governments world over to end the recession through a slew of stimulus packages have had some effect of cooling the credit markets. By March-April 2009 global equity markets began a rebound with India emerging as the best performing one.

India is poised for exponential growth in the next five years, significantly higher than the European and US economies. As such, it will continue to attract more funds from foreign institutional investors (FIIs). Also, the hope of the government unleashing reforms including implementation of Goods and Services Tax (GST) and Direct Tax Code (DTC) will provide a trigger for the next leg of economic recovery.  

So ‘caution’ will continue to be the buzz-word in 2010 as retail investors will have to be careful in choosing some ‘safe’ avenues for their savings albeit with a long-term vision and systematic approach.

Though the options are many, including bank and post office deposits, NSC, mutual funds, insurance, gold and stock markets, but each has its own plusses and minuses.

For risk-averse retail investors, Spice Securities CEO Sudip Bandopadhyay advises: 

“Keep 10 per cent of your savings in bank deposits, which gives a sense of security and enables a person to withdraw at a very short notice in case of emergency.” That apart, he prescribes adequate ‘insurance cover’ for the bread-earner and any other earning member of the family.

Further, his prescription is that 10 to 20 per cent of savings can be in commodities, predominantly in gold and silver.  The investor can buy gold coins, bars or gold ETFs, while 20 to 30 per cent of the savings can be deployed in long term assured return products with direct or indirect government guarantee like PPF, NSC, postal deposit, RBI bonds etc. Another 30 per cent of savings, according to him, can be in diversified equity mutual fund or directly in equity shares of large-cap companies focused on meeting domestic demand.
 
Bank deposits

Fixed deposits with banks are the most popular investment option for Indians. But wide fluctuations in interest rates in recent years has made it worthwhile for investors to become more active in churning their savings. In November 2008, for example, banks were paying interest rate on term deposits in the range of 8.75 to 10.50 per cent for one to three year tenure. Now it is down to 6 to 7.50 per cent for a similar tenure.  And nobody has a clue which way the interest rates will move. While a section of bankers feel that rising inflation and too much of liquidity may force Reserve Bank of India to tighten money supply and raise interest rates, another group thinks that poor credit off-take by borrowers will not allow interest rates to go up. In this context, HDFC CEO Keki Mistry avers that “The price of money is after all a function of demand and supply.” But he thinks we will probably start seeing higher interest rates only after there is a significant increase in corporate credit off-take.

Echoing similar views, Punjab National Bank CMD KR Kamath said, “Rising inflation, which emanates from the supply side, is a concern.  Though monetary policy has limited scope in tackling this aspect of price rise, RBI will not watch from the sidelines. It will initiate steps to manage inflationary expectations in the economy.”

Even if interest rates go back to the range of 8.75 to 10.5 per cent, still they won’t be adequate enough to compensate for spiraling inflation and make term deposits an attractive proposition for people to invest their savings.

Of course the safety and hassle-free nature of bank deposits will invariably make most pensioners and senior citisens opt for them but it comes at the cost of value erosion in savings. So ideally a part of a person’s savings be invested in bank deposits and not all the money.

Post office savings/NSC

At a time when banks are cutting deposit rates to protect their margins, the prospect of rock steady interest rates offered by post office coupled with safety features continues to attract small savings. Official data points out that during April to September 2009, total investments in various postal deposit schemes surged by a robust 32 per cent to Rs 79,237 crore against Rs 56,347 crore in same period previous year.

Income tax benefits, loan facilities and bonus on maturity on some of the deposit schemes are the main reasons why investors are attracted to Postal Deposit schemes offering 7.50 per cent interest per year. Its only drawback, however, is that it is specially meant for small-ticket investments and has a maturity period of five years, besides redemptions are cumbersome.

Insurance

Many life insurers like LIC, IDBI Fortis and Kotak sold guaranteed plans in 2009, which delivers a fixed return year after year. Kotak said you pay an yearly premium of Rs 30,000 for three years and at the end of the period receive Rs 1.20 lakh, which is quite attractive in terms of the annualised returns. So is LIC’s Jeeven Astha which would notch over 6 per cent annualised return in its scheme. There could be more such schemes this year pushing up the return even higher, but it will be better to go for schemes from well established players. Bandopadhyay of Spice Group adds: “The life insurance can preferably be in the nature of term insurance with no investment component.”

Mutual Funds

If one is ready to take certain amount of risk, equity mutual funds are an attractive option. Birla Sunlife Asset Management Company COO Ajay Argal says that investors need to have a 5 to 10 year perspective with a focus on asset allocation to meet their financial goals. Explains he: “The need is to understand that various investment options are available based on the risk-return appetite of investors.”

Macro-wise, India has been attracting investments from across the globe as it is one of the most attractive markets amongst emerging markets as well as global markets. As such, Argal says retail investors too should hold on their conviction and stay tuned to the market.  The best way to choose an equity fund is to pick one that has a long track record of consistently beating their benchmarks, instead of posting a big margin only in the near term, says Value Research CEO Dhirendra Kumar. According to him, a good balanced selection could be achieved by looking at a risk-adjusted returns measure. Kotak 30, HDFC Equity, Tata Pure Equity and Templeton India Growth to mention a few could be some top picks for an investor in 2010.

Stock markets

Among all options, investing in shares is the riskiest but it has the potential to provide highest return if one plays safe and have a bit of luck. One must pick shares of fundamentally strong companies operating in industries with promising future.  For retail investors with medium and long term outlook, equity shares will definitely be the first investment idea for 2010. The next big idea for the new year will be index products like fixed-income, volatility and weather to broaden basket for hedging, which are currently being developed by Standard & Poor’s (S&P) India subsidiary Crisil in a joint venture with National Stock Exchange (NSE).

An index is an indicator of market movement and a hedging tool. A fixed-income index — reflecting movement in interest rates — will be successful once interest rate futures, which is an illiquid instrument, gains momentum. A weather index is useful for various industries, apart from farmers and traders, while volatile index could also be used as a hedging instrument by index traders.  However, these indices are still to be launched in domestic bourses.  And for actual trading to take place in this space, some amendments to the Forwards Contract Regulations (FCR) are to be carried up first and this will happen in parliament in the coming months.

As 2009 witnessed a significant turmoil both in the international and domestic markets, it also highlighted the need for patience and value investing.  In this context, investment expert Gul Tekchandani says: “Investors should focus on value instead of sectors, especially invest in those stocks which have good valuation. For instance, if you come across stocks with 4-5 P/E (profit to earnings ratio) multiple, you should invest in them.”

Experts aver that returns on investment from the equity markets in 2010 will depend on two major factors such as global monetary conditions and earnings growth in 2011. There are fears of continued benign monetary conditions in major developed economies. As such, the volatility may continue and the broad markets may give returns somewhat lower than the earnings growth.

Angel Broking CMD Dinesh Thakkar envisages the outlook for 2010 in equity space as “pretty encouraging even though its performance may not be as exciting as it was in 2009.” Some of the sectors, he suggests for investment this year include banking due to revival in the demand for consumer and corporate credit triggered by the low interest rates. Next to benefit from recovery in the global economic scenario will be the IT sector with firms like Infosys, Wipro and TCS.

Gold

Your ‘grandma’ can’t be wrong when she says buy gold now as its price will touch the sky tomorrow. The yellow metal has been on a winning streak for a decade, only its price swings largely linked to dollar movement have become sharper in the recent few years. Gold being a natural hedge against inflation, it could touch a new high closer to $1,300 an ounce and on the downside may dip to $1,000.  

A R Goyal, Marketing Director of MMTC, foresees correction of gold prices in the short term following the stunning rally in the last one year, “yet the very volatility cannot take the sheen out of the yellow metal.” Unlike other asset classes, gold has always been a ‘safe investment bet’ historically, explains he adding: “It is unlikely that buying gold can be counter-productive in the long run.” As the economy will go through its own cycles of boom and bust caused by external factors on which retail investors have no control, at best, they can safeguard their savings by picking up some good stocks with a long term view.

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