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With a new government at the helm of affairs, the Indian economy is at a very crucial juncture today.
Far from the policy logjam and inaction of the previous years, things on the economic front look encouraging, if not outstanding.
Additionally, low commodity prices and oil prices cooling off have played a positive part in an Indian economy dependent on imported oil.
The Modi government got the much-needed leeway due to the reduced import bill. Moreover, the RBI reduced interest rate unexpectedly earlier in the year.
Overall, while the macroeconomic situation looks promising, an element of uncertainty stills hangs in the air when it comes to the future direction the Finance Ministry, the RBI and the stock markets would take in the medium term.
As far as investing scenario is concerned, there is a palpable uptrend in the long run. Indicating a revived confidence in the India growth story, analyst and expert views are pointing towards Nifty levels that may well cross the 1-lakh barrier in the next 15 years.
Let’s look at the scenario from investing asset point of view, and thereby the ways in which to protect your investments.
Equities
Equities are a long term story. The market has run up quite rapidly in a relatively short span of time. The market return in FY2015 is about 26 per cent.
This uptick seems to be driven fundamentally by politico-economic reasons rather than purely macroeconomic factors.
Equity market depends on growth of economy supported by the growth in the fortune of companies.
In the last few months, there have been steps in the right direction on the economic front. Mines and mineral bills have been passed, insurance bill has been approved, and the Make In India initiative has been launched.
All these steps have encouraged companies invest in new operations or expand existing ones. This will work for the benefits of equity investors.
As companies’ revenues and profits grow, their share price would increase resulting in profit for the investors. Equity scenario looks bullish in long run even though short term fluctuations are bound to be there.
There are many short term local as well as global storms that the new government would have to weather.
Some key bills may be stalled; there could be bad monsoon; war situation in the Middle East could worsen. All these factors impact stock market temporarily and in the shorter term.
One of the ways to check market valuation is by looking at its PE ratio represented by Nifty or Sensex. The Nifty PE ratio as on 31st March 2015 is 22.7. Whether this is high or low depends on the future growth of economy.
If the economy grows at about 8 per cent, there is tremendous upside in the market which will result in creation of massive wealth for its investors.
However, if the government shows any hesitation in addressing the concern of the economy, this PE may fall further resulting in loss of money to investors.
Investors looking for long term investing should look at equity market as the right investment.
Bonds
Indian market has not been very big on bonds traditionally. The scenario is changing, though.
With the new emphasis on infrastructure, companies and public institutions have no way but go for bonds.
Many infrastructure bonds were launched 3-4 years earlier when the Finance Ministry allowed an extra Rs 20,000 to be tax-free if invested in infrastructure bonds.
The scenario may repeat when new infrastructure projects come up. With little over a trillion USD poised to be invested over next 10 years, bonds may be the way to go.
From an interest rate perspective, the bond market will remain attractive for a few more quarters if the RBI reduces rates in a phased manner.
Apart from the rate cuts already effected this year, the RBI has been tight-lipped about future lowering of interest rates.
However, if inflation remains subdued, there is certainly a case for interest rate reduction, leading to a bigger bond market.
How can you protect your investment?
Invest in mutual funds instead of investing directly in individual stocks
Investing in individual stocks require study of company fundamentals.
Most of the investors neither have the time to go through the financials of the company nor the domain knowledge to understand the market and its dynamics.
The best approach for investors to invest in the market while also protecting their investment from company risk is to invest through mutual funds.
Mutual funds invest in a set of diversified companies to minimise risk.
Fund managers managing these funds are usually very competent people selected by the Mutual Fund companies or AMCs and have in-depth expertise on the underlying stocks and other financial instruments comprising their funds.
Invest in high grade bonds
Bonds are also known as fixed income instruments because they provide a fixed income.
Every bond has to go through a rating process by rating agencies. The rating agencies rate the bond based on the company’s ability to pay the interests and principal to the investors.
A high rating signifies a stable and responsible company. Highly rated bonds are also known as high grade bonds, which are recommended for safer returns.
Usually, a high grade bond offers lower returns compared to a low grade bond.
However, high grade bonds are more stable and the possibility of default is very low. Investors can look at private firms bond, Government bonds (also known as G-sec) or bond funds by fund houses which invest in a set of bonds.
Keep cash or gold if there is no investment planned
Investors should avoid the tendency to invest just for the sake of it.
There are times when it is difficult to find any asset worth investing. At such times, keep cash or invest in short term liquid fund.
These funds are almost risk free and also give annualised return of 6-8%. The best part of investing in such funds is that they can be easily liquidated when required. The other option is to invest in gold.
The yellow metal will never depreciate below certain hygiene levels and is a safe bet in the long run. It is easy to monetise or transact, and a real asset with other uses when purchased in the physical form.
A note on the RBI’s policy review meet on April 7th
Somewhat along expected lines, the RBI has not reduced the repo rate. Nevertheless, most banks would have preferred to keep their deposit and lending rates unchanged.
However, SBI, Axis Bank, ICICI BanK and HDFC bank have already reduced their base lending rates after the RBI Governor requested top banks to reduce them to induce companies to borrow and invest.
There may not be many more cuts by the RBI in the offing, but even if they happen, it may be in a phased manner.
This, coupled with the fact that lending rates have already been slashed by a few banks, deposit rates can be expected to follow suit soon and dip.
Deposit investors would do well to renew or reinvest matured investments without further ado and lock on to existing rates before they start falling.
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