Saturday, January 30, 2010

Vision 2020: Where to Invest?

Indians have traditionally been one of the highest savers in the world, but they have rarely looked beyond the traditional asset classes. The coming decade promises to offer a lot of opportunities for investment. At the outset we must understand the difference between 'Saving' and 'Investment'. Typically, savings instruments take care of our liquidity needs, and they are hardly able to beat the inflation. The better part of our surplus money, therefore, needs to be directed towards investment, to enable us to acheive our cherished goals. The ideal way to plan for the future is to seggregate one's portfolio into: Core portfolio also known as strategic investment, and the other part could be the sattelite portfollio also called tactical investment. About 60-70% of the corpus needs to be allotted towards the core portfolio.

The Core portfolio should be made up of the following asset classes:

  • Cash/ Cash like instruments: These instruments offer the highest safety and liquidity, and help us to create a contingency fund to overcome unforeseen circumstances. Bank deposit form a large chunk of this asset class. As bank deposits typically follow the interest rate cycle, they tend to rise when inflation is high. It is advisable to get into long term bank fixed deposits when the interest rate cycle is at its peak.

  • Bonds/ Other fixed income instruments: These instruments are typically used for parking your surplus cash, when the outlook for equity and other risky asset classes turns negative. Rather than putting money directly into Govt./ corporate bonds one must invest through debt market schemes of mutual funds to take care of liquidity and diversification issues. These investments would give a slightly better return as compared to bank deposits.

  • Eqiuty: Also known as risk capital, equity markets are prone to more risk and volatility as compared to fixed income instrumrnts. But history tells us that in india equity markets have given far superior returns over longer investment durations. The core portfolio should include a decent amount of equity for all types of investors. Care should be taken to invest in divetrsified equity funds that invest in large cap stocks, which are less prone to volatility. Typically, the investemnt horizon for equity investemnt should be more than 3-5 years.

  • Bullion: Indians have been investing in bullion since time immemorial. Gold has been traditionally treated as a hedge against inflation. But strictly speaking gold has not lived upto this expectation in the long run. Gold is a typical asset class, whose price is determined more by speculation rather than the intrinsic worth. We generally buy stocks of companies based on their past perforamnce, but gold investment does not follow any such yardstick. However, gold must form atleast 10% of the core portfolio simply as a tool for diversification. The best way to invest in gold is through Gold ETF's.

  • Real Estate: Real estate also must form a reasonable part of the core portfolio. But we must keep in mind that this is one of the most illiquid asset class. While going for a second house/ real estate investment, one must identify a reasonable price for it - a common yardstick should be a rental of 4-5% of the purchase price plus the chances of a capital appreciation in excess of 5% per annum. While going for a residential property it must be noted that plots offer better rate of appreciation as compared to built up flats, become it is the price of land that appreciates, the price of construction does not appreciate.
Other asset classes or investment avenues should form a part of the non-core portfolio. Here active churning is required to take advantage of the dynamic pricing environment. The non core portfoilio can include investment in high beta mid-cap stocks, investemnt in commodities other than gold, and currency/ future and option trading. One must indulge in building this portfolio only if you understand their characteristics and market behavour. The next decade will also provide Indian investors an opportunity to invest in cross currencies and other physical foreign assets.

Wednesday, January 20, 2010

Vision 2020: 'Decade of the Discerning Investor'

The Indian investor never had such a wide choice of investment avenues as he now has. On the one hand this has created an enormous opportunity for 'wealth creation', but at the same time it has imposed a lot of responsibilty on the investor to take prudent measures to avoid 'wealth destruction'.

The generation of 50's and 60's was essentially a generation of savers, there were very few investment products available to them for investing. But, in their hindsight, they were prudent enough to invest a decent part of their savings into gold and real estate. Entrepreneurial spirit picked up in our country in the 70's and 80's, but the predominance of higher income tax rates ensured that investors did not look at alternate investments beyond those that offered tax benefits. The first mass equity related product US 64, popularly known as units, became popular during this period. However, the equity cult was ushered in India by Dhirubhai Ambani in the 80's. But assured return products like Public Provident Fund and Govt. Bonds like NSC, KVC which offered risk free/tax free return of upto 12% never allowed riskier assets to be a part of the Indian investor's portfolio.

The decade of 90's came as a major game changer when Indian economy embraced globalisation, though reluctently in the initial period. The economic stability and the higher growth of the economy led to advent of the bold new Indian investor who was no longer afraid to take risk. A slew of new products like GDR/ ADR/ Variety of Bonds were introduced during this decade. This process continued through the next decade. To guide the investor in choosing the best among the new products a breed of financial advisors including stock brokers, mutual fund advisors, real estate advisors, tax advisors established themselves during the decade gone by. But, unfortunately, in their quest to make more money at the cost of the investor, most of them merely did the job of 'product pushers'. The system of embedded commissions ensured that the so called advisor could give advise even without having a proper understanding of the markets and still could make a lot of money at the cost of the investor.

Towards the end of the last decade, several positive steps have been taken by the regulators to send the message across that it is the end of the road for the 'commissions regime', the advisor would have to earn his fees from the client in lieu of the advice given. The online trading platform has ensured drastic reduction in brokerage. Similarly front loaded commissions on Mutual Funds have been stopped, and a move is on to reign in the insurance commissions. The new direct tax law aims to make the taxation system a simplified affair with a large number of deductions withdrawn, but with more than commensurate reduction in tax rates/ tax slabs.

The new decade promises to be the decade of the 'Discerning investor'. A variety of new products are in the offing: REITS (real estate investment trusts), extension of currency & commodity derivatives, a slew of international investment products. The regulators are bound to create an environment where the investor will be free to take an informed decision based on genuine information. To help the investors take informed decisions, a new breed of qualified advisors will take over from the product pushers, who will guide the investors through the maze of investment opportunities. The investors will not be averse to a fee based system to remunerate the advisors for the services rendered.

There will be lot of opportunities for 'Wealth creation', provided an investor takes decisions based on his risk profile and life goals. The investor will have to balance his Risk-reward matrix to meet his financial requirements. The next decade will open a window to several new opportunities for Indians to invest, we must seize the initiative and invest wisely, because sky is the limit for creating wealth in the coming decade. I propose to highlight the various asset classes for the new decade in my next post.

Sunday, January 10, 2010

Vision 2020: 'India's Decade of Glory'

While the decade gone by transformed India from a sleeping economy to a vibrant economy, the world has taken note of, the decade just started is destined to be 'India's decade of glory', that promises to fulfil the 'Vision 2020'. There are some very strong indicators that are pointing towards India's march towards becoming the fastest growing economy that will dominate the world by 2020:
  • With a younger work force, that is technically more qualified, India has the potential of supporting a sustainable GDP growth of around 10%, India can overtake China as the fastest growing economy during the current decade, as China is likely to be faced with an aeging work force and the spectre of being faced with the compulsion of letting its currency appreciate steadily against the dollar, that will lead to a slowdown in its GDP growth rate over the decade.

  • The political clout of India is going to increase in the world, as its economic prowess spreads. India is most likely to join the elite club of permanent members of the UN Security Council. Its quest for altrnative sources of enegy is likely to make India more or less self sufficient in meeting the growing energy demand during the current decade. The astronomical rise in price of crude oil will make it compulsory for nations to search for alternate energy resources, and India is poised to lead this revolution by promoting the use of Solar, Wind, Hydel and Nuclear energy.
  • The democratic institutions in the world's largest democracy will flourish in the new decade. There may be initial hiccups in the domestic political landscape as the demand for smaller states gathers momentum, but the smaller states may be administratively easier to control in the long run. By 2020 India may adopt the US kind of federal set up with over 40 states. The technological advancement in administrative set-up in the aftermath of the implementation of the unique citizen ID project will aid in smooth administation of the country. The 2- party system at the centre of the federal structure is likely to provide a stable political environment in the country by 2020.

  • India has the potential to become the most sought after Business as well as Tourist destination in the sub-continent, overtaking the likes of Singapore, Malaysia by 2020. Themes like Eco tourism, Education tourism, Health and Medical tourism will lay the foundation of India becoming a major tourist hub by 2020. Infrastructure development supported by a highly sophisticated and efficient transportation system will help India achieve this status.

However, India needs to guard against terrorist attacks from across the border, and the insurgency from within. Our foreign policy needs to be revamped to give an impression to the world that we are not a soft state. Similarly our security forces will have to be equipped with modern gadgets to thwart any attempt to disturb the peace of our country.

Our markets will also reflect the mood of a resurgent economy, but there will be some sectors and some asset classes which are likely to outperform the broader markets. I propose to cover the market scenario for the coming decade, in my next post. Wishing all of you 'Happy Investing' in the new decade.