Indian equities have been best performing among the BRICS, boosted by a burst of economic reforms by the government, this year.
In the year to date, the Sensex index has returned 20.05 per cent for investors and the expectation is that it will do better in 2013. In a note last month, Morgan Stanley cited lower interest rates, a pick-up in infrastructure spending and stable energy prices as factors that would contribute to a likely surge in the stock market. Last week, JP Morgan analysts announced that India is their top emerging market country for next year. Sean Daykin, head of investments at Emirates NBD, also believes that India will continue to do well in 2013.
Virat Diwanji, an executive vice president and head of Branch Banking at Kotak Mahindra Bank says: “In the long term sectors like banking and infrastructure look promising. [Those who are] risk averse can consider investing in defensive sectors such as pharmaceuticals and fast moving consumer durables that may provide stable returns in long term.”
Funds focusing on some of these sectors have had high returns in 2012. Krishnan Ramachandran, chief executive of Dubai-based Barjeel Geojit Securities, which caters to more than 40,000 non- resident Indians (NRIs) , points to ICICI Prudential Banking and Financial Services Fund (year-to-date return 56%) and Reliance Banking Fund (46%), ICICI Prudential FMCG Growth (37%) and Reliance Pharma Fund (28%). “A large number of diversified and small and mid-cap (capitalization) funds have also delivered anywhere between 20 and 40 per cent during the current year,” said Ramachandran.
Given the volatility of the market and the in-depth research required to select stocks, most advisers favour investing through mutual funds.
Anil Rego, chief executive of Right Horizons, a financial advisory firm, recommends using a Systematic Investment Plan (SIP) to invest in diversified funds, including large and mid-cap funds, as well as balanced funds to help manage the downside. “In the current interest rate scenario, one can also have short-term income funds to earn consistent returns,” added Rego.
Large cap funds choices could include ICICI Pru Focussed Bluechip and DSP BR Top 100 and Midcap Funds like HDFC Midcap Opportunity or IDFC Premier Equity.”
Balanced funds help manage the downside. On Hybrid funds, Rego says, one can use a combination of Balanced Funds (Reliance RSF Balanced / HDFC Prudence); Balanced Dymanic PE (FT India Dynamic PE Fund); and Multiasset (Axis Triple Advantage).
An important factor in assessing funds is the return beating inflation. “Funds and equity investments judiciously made have time and again delivered returns over and above inflation. Of course there have been years when these returns do not materialize, but on a long-term basis both funds and equities have delivered superior returns,” said Ramachandran. Diwanji added: “For NRIs, [inflation] is less relevant since their expenditure and cost of living is not linked to inflation in India.”
Gold funds dedicated to the precious metal, not physical holdings, are favoured by some advisers. “Exchange traded funds (ETF) or a savings fund are better options than physical gold,” said Anil Rego, chief executive of Right Horizons. “The disadvantages of physical gold include the high transaction costs as well as storage and the possibility of theft. ETFs would be a lower cost options for a long term investor. However, if one wants to go for regular investing, gold savings funds are a good option. Regular saving is suggested since gold prices are strong.”
Also, the minimum investment is very low for an ETF, compared to buying jewelry or gold coins and bars, said Virat Diwanji, an executive vice president at Kotak Mahindra Bank.
Indian banks offered high interest rates in 2012, and coupled with the depreciating rupee, NRIs were encouraged to remit huge amounts. Of late the interest offered have started to drop, more so on longer maturities.
But, fixed deposits are still an attractive proposition for NRIs and should make up at leas 20 to 25 per cent of your investments, said Krishnan Ramachandran, chief executive of Barjeel Geojit Securities. However, he points out that in the early part of the year NRE deposit rates were in the region of nine to 9.5 per cent, while many an income, bond and gilt funds have delivered returns in excess of 12 per cent during the year.
Investment into fixed deposits and other fixed income products should be in a similar ratio to your age, said Diwanji. “The lower your age, the higher your risk appetite and hence the lower the portion of your investments in fixed deposits. As your age increases, the portion in fixed deposits should increase. However, all investments depend on the long term financial goals of the individual.”
Non-resident Indians (NRIs) must constantly deal with fluctuations in the Indian Rupee. “Typically the rupee strengthens when risk aversion is low, when there is some stability in the global economy and markets. The rupee does badly when the risk aversion is high,” said Anil Rego chief executive of Right Horizons. “If the outlook is for a depreciating rupee, fixed income assets and gold would be a good option as equities are likely to underperform in such market conditions,” he added.
But, given that presently the fixed deposit rates offered by banks are softening, more remittance flows are going to equity and mutual Funds, said Krishnan Ramachandran, chief executive of Barjeel Geojit Securities. “A good strategy for retail investors in this scenario will be increase their regular investments, to take advantage of the weak rupee.”