Investing always comes with loads of risk and uncertainty. Investors find themselves completely perplexed by so many investment options and are left wondering which one suit their risk profile better. Before venturing into any kind of investment, one should
thoroughly study about all the risks involved. As Warren Buffet says, “Risk comes from not knowing what you’re doing”. So, the risks cannot be eliminated but by making an informed choice you can control your risk exposure.
Before we jump into
various investment options, it’s crucial to analyze how the markets have performed in last few quarters. 2013 was sluggish and stagnant for Indian equities market. Reserve Bank of India (RBI) maintained high interest rate regime to control spiraling inflation
which resulted in poor returns in bonds. Real estate and gold market also felt the impact of economic slowdown. However in the beginning of 2014, the economy experienced green shoots of revival and led to excitement amongst the investors. 2014 is turning out
to be blast for equity investors. The MSCI (Morgan Stanley Capital International) index was up by 16% in February and by another 9% in May. The two most popular stock indices of India - Nifty and BSE also have shown a promising trend. Since beginning of 2014,
BSE Sensex has gained 33.5% and NIFTY has gained 32%. S&P has upgraded its outlook for India to stable from negative and World Bank has projected Indian economy to grow by 5.6% in 2014-2015 and 6.4% in 2015-2016.
So what are the options in front of you as an investor and how do they balance on risk – return scale.
Equity instruments are an obvious choice for investors. Equity market has yielded strongest return within a year in the hope of economic turnaround by new Narendra Modi government. Though growth is driven primarily by easy liquidity and not by improvement in
fundamentals of company, market is factoring in revival of fortunes of companies in coming quarters. Key stocks which have added great wealth to investors are Maruti Suzuki (89.8%), Axis Bank (68.6%), Cipla (63.3%), Gail India (59.9%) and Larsen & Toubro (53.4%).
The euphoria is not limited to select stocks as broad based indices such as BSE 500, BSE Midcap and BSE Small cap has also risen by more than 30%.
As the markets have already rallied for last 11 months, it is very difficult to identify stocks based on fundamentals and analysis. Most of the experts are recommending stocks based on macro theories such as invest in sectors which attract discretionary spend
of customers and are cyclical such as consumer durables, auto and auto ancillary, real estate etc. We caution investors to buy stock only if they find valuations cheap based on fundamental analysis of the company and its industry.
2. Mutual funds:
While Individual stocks involve more risk, there’s a much safer option called ‘Mutual funds’. Mutual funds are actively managed baskets of stocks with the assistance of a portfolio manager. They are a good form of investment as you can get high return without
investing time in risk analysis, though a part of return is taken up by the portfolio manager for his services. Some of the mutual funds such as Birla Sun Life Top 100, BNP Paribas Equity Fund (G), SBI Blue Chip Fund and UTI Equity fund have actually beaten
Sensex and Nifty and have returned ~50% in last one year. That’s a lot of money! We recommend you to analyze the performance of mutual funds in past few years against market benchmarks to assess the performance of portfolio manager before investing. In case
you do not have time to pore over this data then you can look at rankings given by business newspapers to mutual funds based on their performance. You can also use SIP (Systematic Investment Plan) route to invest in mutual funds a
s it invests fixed sum on monthly basis and helps you get a better weighted average price for your investment.
3. Fixed Income/ bank fixed deposits/ recurring deposits:
These are one of the safest options and are widely available through your bank account. Fixed deposits provide assured return with limited risk to your capital. In this category, you may also look into instruments like PPF, ELSS mutual fund and NSC which additionally
provide tax savings as well. The returns provided by a bank fixed deposit vary between 8-10% whereas PPF gives you a return of 8.3% and NSC a return of 8.9%.
Though gold has always been considered as one of the most popular long term investment option, but depreciating value of gold have resulted in a mixed reaction amongst investors. The biggest issue in investing in gold is lack of rational analysis to arrive
at a future price of gold. Prices of gold are result of demand supply balance. Though investment in gold is considered hedge against inflation as long term return in gold is always in line with rate of inflation. Gold is also negatively correlated to equity
returns i.e., whenever value of equity rises, value of gold depreciates and vice versa. Hence we recommend if you are investing in equity then include some gold as well in your portfolio to hedge against stock market crashes.
5. Real Estate:
This brings to our last category of investment - real estate. Investment in real estate is complex and time consuming. India yet has no substitute to
real estate like REITs prevalent in US and Europe. Before you invest in real estate it is wise to understand key difference between investing in real estate versus investing in other categories. Investment in real estate requires substantially more funds
e.g. initial down payment to buy a house might easily be upwards of 10 Lakhs, investment in real estate is very illiquid, and require longer time frame. At the same time, leverage available to invest in real estate in form of attractive Home Loans is not present
in any other category. Investment in real estate is also considered good from tax planning purpose as you can offset rental income from your real estate investment against interest outgo on your home loan.
Now if you have decided to invest in real estate, you cannot find better opportunity then India. India is a country of 1.3 bn people and has huge unmet housing demand. For e.g. urbanization in India is only 31% compared to 82% in US and 45% in China. Urbanization
in India will increase to 40% by 2030 giving demand to additional 90 mn houses in urban area. In last few years due to slowdown in economy, buyers have held up on their real estate purchases. As per
property portal PropTiger.com new Narendra Modi government has taken multiple steps in its first
budget and first
100 days to rejuvenate the market that it makes high sense to invest in real estate. Developers who are saddled with unsold inventory are offering attractive schemes such as possession linked plan, no pre EMI plan, guaranteed buyback plan, etc. which will
give huge returns to investors in 3-4 years. We believe Indian real estate is at bottom of cycle and prices and schemes offered by builders make it an attractive investment options commensura
te to risks involved.
There are several investment options with variable degrees of risks. The choice lies with the investors as to where they want to put in their money. Investing is no rocket science, but applying a little brain in understanding the underlying risks can make a
lot of difference in getting you high returns on investment.