INVESTMENT STRATEGY FOR YOUR SURPLUS FUNDS IN THESE VOLATILE & TRYING TIMES- TO CREATE A BALANCED PORTFOLIO TO GENERATE POSITIVE RETURNS
EQUITY SCHEMES:
Kindly refer to our various recommendations and suggestions over the past few months. We had dissuaded our clients to invest in Equity/Equity related products as we had predicted a long drawn bear phase in the markets. Yesterday’s’s ET panel discussion also reiterates the same and most of the Top Advisors have predicted a SENSEX between 8500-9000 by December 2009. Clearly a bleak picture of the market scenario.
INCOME/GILT SCHEMES:
As against this,we had recommended investments in Income Schemes way back in November 2008. This asset class has generated close to 30-40% p.a. over past 3 months ( since we recommended this asset class). Going forward, we forsee the interest rates heading southwards but with a lot of volatility attached due to additional borrowing programme of the Government ( for their various Fiscal Stimulus Packages). Do we see similar returns being replicated going forward? Answer is uncertain. At best it can generate lower double digit figure returns say close to 12-15% p.a.
ARBITRAGE SCHEMES:
Another asset class that we have recommended in the recent past is Arbitrage Schemes. With possibility of reverse arbitrage or discount arbitrage, this asset class ( inspite of bearish equity markets) is capable of generating 8-9 % post tax returns over next 6 months investment horizon.
GOLD SCHEMES:
Gold also has been shining in these times of distress and worldwide turmoil. This asset class thrives when all other fail as there is flight to “safe heavens” like Gold. January also saw gold reaching new (nominal) highs in a range of currencies, including Sterling, Euros, Australian Dollar, Canadian Dollar and Rand. When gold goes up in every currency, it is normally a good sign we may be in a genuine bull market for the metal.
Looking to gold equity performance relative to gold, investors will have noted that for much of 2008 gold equities underperformed the bullion price. The reason for this under performance was the general equity malaise but additionally that gold companies had struggled to control cost inflation. As regards rising cost inflation the news is improving; prices of many consumables have been falling sharply and this means that industry cost control this year may prove to be better than in the past. As a result, we believe that the industry has restored its “beta” to the gold price making it a much more attractive opportunity for investors- potentially giving gold equity investors more “bang for their buck” relative to gold going forward. We have certainly seen evidence of this in recent months.
Due to announcement of various Fiscal Stimulus packages, Federal Reserve’s Balance sheet has grown from $800 mn to $2.3 trillion. This could lead to US Government having no choice but to print more currency. In such a scenario a dollar collapse cannot be ruled out either on its own or as part of a broader crisis of confidence in paper currency. Since Gold prices have a negative correlation to dollars,Gold should do well in such a scenario.
Hence, 10% allocation to this asset class with 6-12 month horizon will make immense sense in the current crisis of confidence. Over past 3 months,Gold Schemes investing in Gold mining stocks have generated close to 30-35% p.a. Going forward a reasonable expectation of 12-15% p.a. from this asset class should not be ruled out.
Hence as can be seen from above, most of the asset classes have become very unpredictable with a lot of volatility attached to it. Hence, the only way to make decent returns going forward is as follows:
- Identify an asset class which is poised to deliver decent returns and time your entry as close as possible to generate absolute positive returns over a fixed period of time
- Exit the said asset class when one achieves the desired absolute returns. In short be nimble footed and switch asset classes as and when one achives desired returns expectations
- Switch to another asset class or the same asset class as when opportunity arises. Till such time stay invested in Liquid schemes
- Invest some portion, say 25% of your portfolio in schemes like Arbitrage which will give a) steady positive tax free returns month on month and b) give stability to your overall portfolio.
- Invest say 10% in Gold Schemes investing in Gold/Platinum mining stocks
To conclude:
- Invest in INCOME/GILT at opportune time with an intention to exit on interest rates going down. Investment Horizon: 6-12 months. Expected Returns: 12-15% p.a.
- Invest in Arbitrage Schemes on or before the last Thursday i.e. before the F & O settlement date. Hold it for 4-6 months. Expected Returns: 8-9% post tax returns
- Invest in Gold Schemes with 6-12 month horizon. Expected Returns: 12-15% p.a.
- Temporary parking in between changing asset classes in Liquid Plus Schemes: Expected Returns: 6-7% p.a.
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