Where to invest ? So many Indians and NRIs are now a days asking this question , specially after Real estate market is not appreciating at a pace which used to be .
I am a great believer of Asset allocation . One should not be putting his all eggs in one basket . Key is to divide your wealth according to your risk appetite , your liquidity requirements and current market scenario. There are 2 ways of asset allocation . One is passive asset allocation in which a investor doesn't understand economic cycles or does not want to take market risk. In passive asset allocation irrespective of economic condition you don't change your asset allocation where else in active asset allocation you tend to change your asset allocation depending on market conditions.
Options available in India where we can invest and diversify are Real estate, gold , Fixed income products ( DEBT funds), Domestic equity market , Offshore equity market , Private equity holdings .I will share my current view on each asset class and one can allocate there assets dynamically depending on current market conditions.
Real Estate :
Indians are crazy about real estate . People have created a huge wealth in real estate due to its illiquid nature, black money involved ,no transparency . Real estate in past have fetched around 16 to 20 percent returns if we consider it from 1980s( Not considering land as it involves very high risk). Despite all economic cycles the asset class is considered to be an appreciating asset class. However timings at which you are investing will decide the returns on assets. For eg . My partner has bought flat at pune in 1990 . He bought it at a price of 900 rs per sqft . Within couple of years price shoot up to 2400 rs per sq ft . Then came a Japanese crash in 1993 and prices again went down to 1100. Current market price of that flat is 10000 per sq feet . If you will calculate what IRR my partner has earned is 20 percent year on year . If any one had invested @ 2400 in 1992 the IRR comes down to 13 percent year on year . So timings does matter a lot while buying any property for investments. Currently real estate prices are very high and we have seen its bull run . My view is real estate market may either will go down for couple of years or you will find the same price after 2 to 3 years ( Time correction).
Gold :
Gold is considered as hedge against inflation in all developed countries . Inflation in developed countries is not more than 2 to 3 percent . So in dollar terms gold is going to grow @ 2 to 3 percent yoy. In INR terms one can fetch 8 to 9 percent returns in gold considering rupee depreciate avg 5 to 6 percent every year since 1930. How ever gold will deliver good returns when developed nations like US ,UK, Japan are struggling . Considering all good and bad years gold since 1935 has not beaten inflation in India . Gold has delivered almost 8 percent yoy since 1935. however if you feel that worlds economy will not perform then you can increase your asset allocation in gold.
Fixed Income products :
Fixed income product considers fixed deposits ,post deposits , and various debt products available in market . In coming years you can expect 7 to 12 percent return in this asset class . It has always beaten inflation in long run . Its highly liquid and it gives stability to your portfolio . I highly suggest to allocate at least 15 to 80 percent of your portfolio depending on your age.
Domestic equity market :
Best way to participate in economy is through equity market . People loose money in equity market if they don't apply logic and relying on magic . Intraday trading , F&O trading , buying penny stocks, buying stocks on rumors and not on fundamentals are the area where people loose money and finally one day he will quit equity market saying " its not his cup of tea" . If you don't have a neck on stock picking or you don't understand economy then you should participate this asset class through mutual funds . let fund manager do this job paying negligible fees. Again like real estate timing is very important in equity market . In long run it has fetched around 18 percent yoy since 1980 . It will continue to deliver similar kind of returns in future . Allocations to equity market will always give you that extra kicker to your portfolio . Considering average age of Indians is 26 , i cant believe that Indian economy will not perform .Equity market is the reflection of economy in the long run. Price to earnings, price to book value , earnings growth etc are certain parameter through which you can judge weather market is expensive or not .
Overseas equity market :
More and more people are travelling abroad, More and more people want there child to study abroad . World is now a smaller place than it used to be before 50 years back. India is import oriented country so our currency is going to depreciate further in coming years . If we will not participate in dollar or other foreign currency then travelling abroad , studying abroad will be more tougher and rs vs dollar will always pinch you hard rest of your life . So If you are young I would always advice to park at least 20 percent of your portfolio in overseas market . Eg . Last year US market has delivered 13 percent but if you are Indians you earn 25 percent ( 12 percent currency depreciation ) .
Private equity :
If you are HNI (High networth individual) than part of your wealth can go to private equity. Its high risk high return asset class. Basically in private equity you are taking stakes in particular company which you are bullish on and if company needs funds. Private equity is risky as there are no regulators but it can deliver tremendous returns. You need to consult private equity consultant before you invest and it needs expertise .
Diversify your portfolio using this few asset class to create serious wealth . People make mistake to park there entire wealth in single asset class. Think wise ... Think twice .!!!!!
I am a great believer of Asset allocation . One should not be putting his all eggs in one basket . Key is to divide your wealth according to your risk appetite , your liquidity requirements and current market scenario. There are 2 ways of asset allocation . One is passive asset allocation in which a investor doesn't understand economic cycles or does not want to take market risk. In passive asset allocation irrespective of economic condition you don't change your asset allocation where else in active asset allocation you tend to change your asset allocation depending on market conditions.
Options available in India where we can invest and diversify are Real estate, gold , Fixed income products ( DEBT funds), Domestic equity market , Offshore equity market , Private equity holdings .I will share my current view on each asset class and one can allocate there assets dynamically depending on current market conditions.
Real Estate :
Indians are crazy about real estate . People have created a huge wealth in real estate due to its illiquid nature, black money involved ,no transparency . Real estate in past have fetched around 16 to 20 percent returns if we consider it from 1980s( Not considering land as it involves very high risk). Despite all economic cycles the asset class is considered to be an appreciating asset class. However timings at which you are investing will decide the returns on assets. For eg . My partner has bought flat at pune in 1990 . He bought it at a price of 900 rs per sqft . Within couple of years price shoot up to 2400 rs per sq ft . Then came a Japanese crash in 1993 and prices again went down to 1100. Current market price of that flat is 10000 per sq feet . If you will calculate what IRR my partner has earned is 20 percent year on year . If any one had invested @ 2400 in 1992 the IRR comes down to 13 percent year on year . So timings does matter a lot while buying any property for investments. Currently real estate prices are very high and we have seen its bull run . My view is real estate market may either will go down for couple of years or you will find the same price after 2 to 3 years ( Time correction).
Gold :
Gold is considered as hedge against inflation in all developed countries . Inflation in developed countries is not more than 2 to 3 percent . So in dollar terms gold is going to grow @ 2 to 3 percent yoy. In INR terms one can fetch 8 to 9 percent returns in gold considering rupee depreciate avg 5 to 6 percent every year since 1930. How ever gold will deliver good returns when developed nations like US ,UK, Japan are struggling . Considering all good and bad years gold since 1935 has not beaten inflation in India . Gold has delivered almost 8 percent yoy since 1935. however if you feel that worlds economy will not perform then you can increase your asset allocation in gold.
Fixed Income products :
Fixed income product considers fixed deposits ,post deposits , and various debt products available in market . In coming years you can expect 7 to 12 percent return in this asset class . It has always beaten inflation in long run . Its highly liquid and it gives stability to your portfolio . I highly suggest to allocate at least 15 to 80 percent of your portfolio depending on your age.
Domestic equity market :
Best way to participate in economy is through equity market . People loose money in equity market if they don't apply logic and relying on magic . Intraday trading , F&O trading , buying penny stocks, buying stocks on rumors and not on fundamentals are the area where people loose money and finally one day he will quit equity market saying " its not his cup of tea" . If you don't have a neck on stock picking or you don't understand economy then you should participate this asset class through mutual funds . let fund manager do this job paying negligible fees. Again like real estate timing is very important in equity market . In long run it has fetched around 18 percent yoy since 1980 . It will continue to deliver similar kind of returns in future . Allocations to equity market will always give you that extra kicker to your portfolio . Considering average age of Indians is 26 , i cant believe that Indian economy will not perform .Equity market is the reflection of economy in the long run. Price to earnings, price to book value , earnings growth etc are certain parameter through which you can judge weather market is expensive or not .
Overseas equity market :
More and more people are travelling abroad, More and more people want there child to study abroad . World is now a smaller place than it used to be before 50 years back. India is import oriented country so our currency is going to depreciate further in coming years . If we will not participate in dollar or other foreign currency then travelling abroad , studying abroad will be more tougher and rs vs dollar will always pinch you hard rest of your life . So If you are young I would always advice to park at least 20 percent of your portfolio in overseas market . Eg . Last year US market has delivered 13 percent but if you are Indians you earn 25 percent ( 12 percent currency depreciation ) .
Private equity :
If you are HNI (High networth individual) than part of your wealth can go to private equity. Its high risk high return asset class. Basically in private equity you are taking stakes in particular company which you are bullish on and if company needs funds. Private equity is risky as there are no regulators but it can deliver tremendous returns. You need to consult private equity consultant before you invest and it needs expertise .
Diversify your portfolio using this few asset class to create serious wealth . People make mistake to park there entire wealth in single asset class. Think wise ... Think twice .!!!!!
Good informative article Karim....Some of the facts about real estate is truly educating...But Still I expected u to elaborate on active assets allocation strategies. I m also bit confused how the relation of performance of gold with world economy was established..
ReplyDeleteAlso educate us on how to read fundamentals of the stock. I mean PE ratio, book value, fair price, etc...Your views on over seas market was a new thing for us and its truly mull-able option. Diversification of Fixed income according to age is also a good point delivered.. One suggestion is now write your articles on individual investment option separately. It would be very informative for us..All the best. Bingo !!
ReplyDelete@kairav i will write separate article on dynamic asset allocation and stock picking techniques .
ReplyDeleteWhenever economy is in trouble , govt tend to print currency to bail out companies, loan wavier , and distributing freebies. In the process there are chances that currency will loose its value. Now lets look from an global bank prospective . Most of the global banks of the world hold there cash reserves in dollars. Lets take an example of HSBC bank . HSBC bank is holding its currency reserves in USD and USD looses its value against other currency . A client from Singapore withdraws a huge amount from HSBC bank in Singapore dollar . Bank has USD which is depreciated and paying a payment in singapore dollar which has appreciated . Global banks end up loosing tremendous money. To safeguard banks sell there USD reserves and buy gold. On weekly or daily basis they keep selling there gold to meet up currency requirements.
ReplyDeleteNow you will ask me , whats the point when while selling gold again banks will get USD as gold globally is traded in USD. The answer is , whenever Central bank print currency in the economy the inflation will go up . eg in 2010 inflation of US went up from 1.5 % to 4% as they have printed currencies in 2008 & 2009. Gold is considered as hedge against inflation so gold price will also go up if inflation will go up (inflation linked gold debentures). So when any global bank sells gold and gold price is up , they will get more dollar and hence they hedge there positions against other appreciating currencies .
So when all the global banks are after gold obviously gold price is going to go up .So in bad times gold will always performs .