Volatile year ahead; plan investments accordingly

Written by Brijesh Damodaran | Updated: Jan 28 2014, 15:06pm hrs
InvestmentAs 2014 will be an election year, markets are expected to be volatile.
The previous year was a roller coaster for investors. Most investors, to their dismay, found that even debt investments could generate negative returns.

As 2014 will be an election year, markets are expected to be volatile. However, equity, as an asset class, is showing a strong bias for ownership. For instance, last year, most stocks rallied between October and December, and investors who continued to be in the market instead of timing it got higher returns than bank fixed deposits. In fact, the last quarterly results of companies with good governance and strong market focus also showed growth.

So, the bottom line for equity investors is that they should look at stocks from an ownership point of view, with a multi-period holding, and the returns over the long holding would be higher.

Debt disappointed investors last year. Negative returns on account of yields going up in gilt funds made them think twice and look at debt funds with less conviction. However, with the RBI governor displaying a pragmatic approach, interest rates are likely to come down, which should make debt funds a normal investment decision. Investors, wiser from last year's experience, should not hesitate now to invest in debt funds with duration in excess of 12 to 18 months.

Gold continues to disappoint. With US equity making a comeback and the taper expected to begin this year, gold may feel the heat. Having said that, if the government eases the import mechanism and global currencies are volatile, there could be a surprise here.

After a long time, real estate is becoming less of a favourite. With prices consolidating and inventory piling up, price appreciation may remain muted. This is a very good time for the end-user to buy. Indian markets today are also globally linked. With the hardening of the US bond yields and the US equity markets, geographical allocation and diversification of portfolio would be a smart move. However, factor in the risk of currency appreciation or depreciation, especially in the emerging markets.

Indian economys growth foundations were laid in 1991, when the country was in the midst of a balance of payment crisis. The measures taken then helped the economy grow faster a decade later. Similarly, as an investor, you need to have a portfolio framework and monitor it regularly to make your investments grow.

Understanding your risk profile and the asset allocation is the key. Do not go by your peers investments and returns. Lay down your investment goals, the time horizon and anticipated returns. For investments with five-year-plus horizon, equity should be the asset class. Look at companies with growth potential and low debt in their books. Always remember that volatility is not risky and the sooner you understand the difference, the better will be your investment strategy. Smart investors always take advantage of volatility.

Inflation is sticky and you cannot wish it away. At this moment, investing in longer-term funds in debt is recommended. While you cant control the external environment, you can always manage your investment strategy. So, always keep your investment strategy simple and easy to understand to reap long-term gains.

The writer is founder and managing partner of Zeus WealthWays LLP