Earning money the right way is an important part of our culture and the festival of Diwali emphasises the concept. Here are some cues to investing in the next Samvat year; of course, these are over and above the basic principle of early, regular and disciplined investment.
Real estate has given fantastic returns to investors over the last decade-plus. A part of Mumbai sells garages at a price with which, in other parts of the world, you can get a nice apartment. At some point of time, the law of averages will catch up with such over-valuation. Though I doubt it will happen next year, I will recommend you to apply the following two principles for your real estate investment.
One, it will be rewarding to invest in real estate, where the cost of construction is around or above the cost of land. While there are locations where this is not possible, it should be used as a thumb rule to check the extent of over-valuation.
Two, a majority of gains in real estate comes when one can predict the expansion of a city. In Mumbai, the commercial centre has moved from Nariman Point, Ballard Estate and Fort to BKC and Lower Parel area. In Ahmedabad, the city centre has moved from Relief Road to Ashram Road to CG Road to satellite Road to SG Road over the last few decades. Try to buy property where the city is likely to expand and it will be rewarding over a period of time.
Like real estate, gold has given pretty impressive returns over last decade-plus. The yellow metal provides diversification in bad times. While there is no scientific way to value gold, it should form part of everyone’s portfolio for the protection it provides against inflation and massive printing of money. My recommendation will be to invest in gold via gold exchange-traded funds (ETFs) rather than physical gold to save on wealth tax (which one has to pay on physical gold), income-tax (ETFs have concessional rate of tax), transaction cost, safe keeping and ease of averaging.
Notwithstanding the fact that real interest rate in India has been generally against the saver, allocation to fixed income is warranted for the safety and regularity of income. India has one of the highest nominal interest rates in the emerging markets. The debate has now shifted from if the interest rates will be cut to when will rates be cut to support growth. My recommendation will be to add duration on your debt portfolio and lock into the longest tenor bank deposits if you are not a taxpayer and tax-free bonds if you are a taxpayer. The next few months will see a couple of initial public offers of tax-free bonds.
I will also recommend one to invest in a property in an upcoming area and put it on rent around current debt yields to get the best of fixed income as well as real estate. I will recommend tax-paying investors looking for regular income to consider investing in hybrid funds such as monthly income plans through systematic withdrawal plans for optimizing post-tax return.
The Sensex delivered marginal returns in last Samvat year or even in the last four years. One cannot invest in equities in the hope that the law of average will catch up with equities and next Samvat year will compensate for the past. Next year looks volatile as the US fiscal cliff, pre-election budget, slowing growth, supply of paper through divestment and MPS and global financial crisis put a cap on the upside. The downside seems to be protected by valuation, the reform process initiated by the government and global liquidity.
My recommendation will be to build a portfolio of bluechip stocks across sectors such as pharmaceuticals, resources, private sector banks and mid-caps. Invest through mutual funds if you can’t manage market volatility. While equities at current valuation can be invested for long-term wealth creation, regular monitoring and buying when markets are falling and selling when markets are rising on marginal portfolio will enhance the overall return and ensure a good night’s sleep even when markets are falling.
I don’t have any expertise on international assets but will recommend investors to use trustworthy experts’ service to create diversification as well as better returns. Common sense suggests that US properties and select emerging market equity may provide bargain opportunity.
I received a wish this Diwali that goes something like this: “may goddess Laxmi bless you so much next year that even Rajnikant can’t count your wealth!” This transformation in wealth will take a miracle, something my mundane advice is not. What I have are some time-tested simple principles of early and regular investment and disciplined asset allocation. These will for sure create prosperity for you in the long run.
Nilesh Shah is director, Axis Direct.