Stock market investors would not be too disappointed with 2012. The Bombay Stock Exchange Sensitive Index or Sensex, rose 24.5 per cent this year. Even the mid-cap and small-cap indices rose 36 and 32 per cent, respectively. But retail investors were not too impressed.
The reason: In 2011, the Sensex fell 25 per cent, mid-cap 34 per cent and small cap 42 per cent. In other words, if you had invested in any of the market indices two years ago, you would be sitting on marginal profits or even losses. In fact, the only instrument that has given some solace is gold. The returns, though slower this year at 12 per cent, have been quite substantial over five years at 22 per cent. However, one is not sure if the same trend will continue in the coming years. Also, one cannot have just gold in the portfolio.
No wonder, investors like Yash Sinha and Sachin Bajla have been dabbling with gold and other asset classes.
Yash Sinha, human resource professional with an insurance firm, started accumulating 5-10 gm gold coins since 2009. "My faith in equities was shaken quite badly after the 2008 crash. I decided to buy gold coins whenever I had some surplus," he says.
Sachin Bajla, entrepreneur, is more market savvy. He bought properties in 2008, which have gone up three to four times now. But now he is not so bullish on the property market. "Going ahead, property prices will go up maybe 5-10 per cent annually for some time. I will look at rare commodities now," says Bajla, adding he has never been a fan of equities.
Sinha and Bajla are just two examples of people who have lost faith in equities, and for good reason. While 2012 was quite good for the equities market –Go a little back and things just get worse for equities. Over a five-year period, the Sensex has returned less than a percentage point. Both mid-cap and small cap have fared worse at -6 and -10 per cent, respectively.
But it is not all about equities.
There seems to be a slowing in property growth rates as well. In the two metros, Mumbai and Delhi, the rate of return of real estate has been slowing down. According to the National Housing Bank's Residex, rate of growth in property prices fell to three per cent in Mumbai and seven per cent in Delhi, till September. Even Chennai, Bangalore and Kolkata have not been doing so well this year. In Chennai, prices have dipped marginally. Of course, given that the data is an aggregation of property prices across the two cities, there could be sharp rises and dips in different areas, depending on demand and projects. But the overall picture for property, as Bajla says, is not very bright. Returns from debt at 8-10 per cent would hardly inspire anyone. In fact, even tax-free bonds failed to attract investors. The Rural Electrification Corporation issue raised around 75 per cent less than the targeted Rs 4,500 crore and there hasn't been much enthusiasm for the Power Finance Corporation issue which led to its extension by a week.
Investment in 2013 will be a tough call. Market experts believe equities could do better and they are betting on two things: One, the resilience it has shown despite bad news, global turmoil, lower GDP numbers and continued high inflation. Two, there is hope that things will start turning around from the second half of the year. Like Rishi Nathany, CEO, Dalmia Securities, says, "There is a high level of investor apathy towards markets, as well as disbelief that equities could give good returns in the future. However, these are times when equity markets should be bought into as valuations are attractive."
For someone who is just starting his/her career and has 25-30 years to retire, equities should be the way to go because they have done well for long periods of time. The allocation can be as high as 70-80 per cent. Being aggressive at this age ensures the corpus gets the advantage of compounding over longer periods of time.
For one, investors should be diversifying and equity is a must, says Nilesh Shah, director, Axis Direct. "Over a 20-25-year period, equities have beaten gold. So, ones with that kind of time horizon should be in equities to earn returns over time."
For instance, the Sensex has returned 16.71 per cent annually since 1980. International gold has returned 3.63 per cent a year. But Indian investors have also benefitted from rupee depreciation. So, the returns for Indian gold investors have been much higher at 11.12 per cent a year. Clearly, equities score over gold in such long periods and by a good 5.5 per cent annually. However, Shah says investors should take the SIP (systematic investment plan) route to equities, because it will help take advantage of the volatility.
Also, if one is going for debt in the coming year, the preferred option should be duration funds because the value of the portfolio will increase if interest rates fall. However, if you want to get into duration funds for capital gains, go for the longer-term duration funds.
If you are close to retiring, say in another two-three years, one option is to shift the entire money into debt because it will protect the money from any capital erosion. But given that the outlook is that interest rates are likely to come down, putting the entire money in fixed deposits will not be a great idea. It is important to have some equities, at least 20-30 per cent, because it will give the portfolio the necessary fillip to beat the inflation rate.
It is important to have some gold, perhaps even some silver, given their exceptional performance for some time. Gold has done better than equities in the the last decade as well. However, even in good times, restrict your exposure to 20-25 per cent. Also, use the exchange-traded fund route as it is more tax-efficient than physical gold. If you sell physical gold before three years, the capital gains will be added to your income and taxed. After three years, there will be inflation indexation benefits for long-term capital gains on physical gold. In the case of ETFs, after holding the units for just a year, you are eligible for long-term capital gains.