How to invest in a red hot market

How to invest in a red hot market
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First Published: Fri, Oct 29 2010. 12 17 AM IST
Updated: Fri, Oct 29 2010. 12 17 AM IST
Markets are red hot again. Hit any asset class with some money and it throws back more. Gold, real estate, stocks—everything is up over a 12-month period. Stocks and real estate are back to the 2008 boom-time highs and gold is the new oil. Driven currently less by local events than global ones, what we are seeing is the dollar tsunami lifting asset prices. Two reasons are fuelling hard currency flows into India. One, the no-cost money in the US is looking around the globe for quick and easy return. Two, the sword of a double-dip hanging over the US gets India to become a separate sliver on the emerging market asset allocation pie. What should we do in such a market—keep our money in fixed deposits and lose purchasing power to inflation and taxes or keep going? Keep going but with the seat belts on.
Readers of this column know what I will say for stocks—take the mutual fund road, invest every month, don’t hit the market with a large lump sum and go with the Mint50 list of mutual funds. No, there is no guarantee of return, but a five-year holding period with systematic investments in a pedigreed fund should not go wrong.
How do you handle gold? Yes, there is an upside still left in gold and this will remain as long as the world looks for another globally accepted store of value (the dollar is in the danger of losing that spot) and in its absence uses gold as the default. Gold needs to be a part of our portfolio, but buy now? Um... Maybe not. Rather get the gold in the locker valued. And then see what part of the asset allocation is already in physical gold – never mind that we may never sell those antiques that are handed down over generations. If you are between 5-10% of total assets (I don’t include one residence as part of my net worth math), please don’t buy any more. In fact, if you are over this level, sell in a staggered manner over the next few years.
Real estate is more complicated. It is usually always a good time to buy the house in which you will live, but buying when the market is red hot may not be the best thing to do. So when do you know that markets will correct? A rough rule used by real estate investors is to buy when the price of the property is below 10 times the annual gross rent it can get and sell it when the number hits 20. So, if the annual rent is Rs6 lakh, you should not be buying if the property is valued at anything over Rs1.2 crore. Another rough guide is that the yield should be at least 3% on the property—that is gross annual rent divided by the property price. If both parameters are way off, it is best to wait for some cooling down to happen.
Endnote: Those that attempt to manage news do so in a manner that creates impressions. The one impression in the minds of the average consumer of media is this: The Securities and Exchange Board of India (Sebi) chairman is pushing business towards his former place of work—the National Securities Depository Ltd (NSDL)—and for some reason is partial to one of the promoters of NSDL—the National Stock Exchange (NSE). One question that has remained unasked is this: Why he is doing this? Is he the owner of NSDL that he will personally benefit from greater business and profits? No, NSDL is promoted by a mix of public, private and foreign institutions (http://bit.ly/dlV9Nx). So may be he has a stake in NSE with family and associates on the board. Um..., no. NSE is promoted by government-owned institutions and private banks (http://bit.ly/9oQpVW). Is there anyway in which he will personally benefit by doing this? The answer remains: no. So, it could be that he is not pushing business towards anybody. May be he is just doing his job and in that not allowing those who bend the system to function. The other strange story is about the compensation of the NSE chief. It seems he rewards himself very well. But isn’t there a board that decides on issues such as top management salaries? May be the board comprises his family and close associates. Nix again. Names (http://bit.ly/aKRXQb) that most people would agree are still clean in a country where fewer and fewer in positions of power remain in that group make up this list. The hounding out of two good men is on and is already partly successful. But readers must remember in the next few years of chaos that these are the guys who gave us safe and clean markets.
Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money and can be reached at expenseaccount@livemint.com
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First Published: Fri, Oct 29 2010. 12 17 AM IST