Welcome to the first episode of year 2009. Yes, right now things still look a little shaky on the financial front but we believe you CAN emerge stronger in the year ahead if you just get it right. On 30 Minutes to Wealth today we'll map out the investment strategy for the year ahead.
2008 was a year of shock and disbelief that stood every market prediction upside down. But we are bravely moving ahead and telling you what to expect in 2009.
This year there are big expectations of several interest rate cuts by the central bank or RBI to boost the economy and you as an investor need to be smart enough to make a play on these expected rate cuts. How do you do that? Simple - by investing in bonds and debt funds. And that's what we'll tackle as our big question: can you and how do you make money in bond funds?
BIG QUESTION: Make Money in Bond Funds?
Why Debt Funds now?
Because interest rates are falling. In fact we are very near another rate cut that RBI should announce soon. When in rates fall, bond prices rise.
How do you invest in bonds?
Very much like stocks, either directly by trading directly on the market or through mutual funds; the second option works for the retail investor as bond trading is difficult.
Two kinds of bond funds:
# Government only bonds - called gilts
# Government plus corporate bonds - called bond funds
(Gilts are safer than bond funds)
Why are we talking of bond funds today?
# When interest rates fall, bond prices rise - more people will want a bond that pays 12 per cent than one that pays 9 per cent. So as new paper comes into the market with lower rates, the demand for older bonds rises, and that means their price goes up.
# While debt funds usually give only an interest based return, there are times like now when they will also give capital appreciation. This happened in 2002-04 when interest rates fell sharply. The same is happening now. Gilt funds have already run up by about 20 per cent in the last six months, the next rally will happen in the bond funds as corporate paper prices are yet to rise. Expect this to happen in first half 2009.
So there's money to be made in Bonds. If there's money to be made, the next question is where can you make the most? Going by past performance, we've culled out 5 best income or debt funds:
On one-year return, Canara Robeco Income fund has given a whopping 23.7 per cent return. Mouth watering, isnt it?
The other debt funds are:
# IDFC SSIF - Invt. Plan, Plan A - Growth has given over 16.47 per cent
# ICICI Prudential Income Fund - Growth has given 16.02 per cent
# Birla Sun Life Income Plus - Growth has returned 13.00 per cent
# Kotak Bond Deposit - Growth is at 10.46 per cent
So go ahead and invest in a good reputed bond fund, before this week is out. That's about bonds.
But it is the beginning of the year and I am sure all of you are inundated with predictions from experts on what's going to happen in 2009? Will the prophets of doom be proved right and will the global economy hit a deep pocket of recession? Will equities tank more? What will happen to housing? Guess what, we're adding our bit to all the experts’ views you are hearing around you. So, what do we make out from facts and figures on how things will pan out in 2009?
Good news is that:
1. Inflation has peaked out and experts are actually saying that it will fall to negative levels by July. Overall economists are expecting an annual inflation figure of around 2 to 3 per cent.
2. Interest rates will fall
3. Deposit rates will fall
4. Home loan rates drop
5. Debt funds will rally
6. But as the GDP growth slows to under 7 per cent
7. Stock market will take longer to recover
8. Outlook on the jobs front too is not very happy
That's a pretty quick macro view and getting down to the specifics, let’s start with equities. It is hard not to get drawn into the game of trying to pinpoint the very bottom of the stock market and we don’t see any signs signaling a recovery in equities anytime soon. Next 4 to 6 months will be fairly tough for the corporate results; a general election mid year also throws up political uncertainty. It is not good for the markets. Global economies are not looking good either. So 2009 will perhaps be the BEST year for investing in stocks. Why? Because the equity markets will bottom out and you can buy cheap. See how much closer we are to the bottom today than we were exactly a year ago; so absolutely the best year to take aggressive exposure in the stock market. Most of us have very little equity in our portfolios, so large cap diversified funds and index funds are the safest ways to ensure that you correct that imbalance.
Buying into Nifty BeEs is also another option. The only piece of advice that can be given today is: please have at least half your money in equity - if direct stocks is too tough for you, do it through the mutual fund route. But you have an opportunity once more to be part of the wealth creating asset class called equity. Don't lose it.
And real estate is poised for a sharp correction. Already property rates have begun to come down in Mumbai. Other cities will follow soon.
Yield, for those who are wondering, is the total rent from a property in a year divided by the cost of the house. If total rent is Rs 1 lakh a year and the property value is Rs 60 lakh, the yield is 1.7 per cent, for it to go up to 3 per cent, either rents will go up, which is unlikely in a slowdown, or property prices will have to fall. So this property will have to fall to Rs 35 to 40 lakh!
Keep looking for the house you want to live in and you are sure to get a deal that suits you soon enough. Also, if I get that dream home, I may not wait for prices to bottom out - I don’t mind paying a bit more if it is a house I will live in for the next 10 to15 years.
Gold was the story of 2008 and it is not over yet. As always, this is not to tell you to shift ALL your money into gold, but increase your asset allocation to between 5 to 10 per cent of the total money you have. Gold is not a great product for income creation - it is at best a hedge against inflation and a safe metal for uncertain times. So don't expect dividends or high capital appreciation from your gold ETFs.
And finally - safe haven - bank deposits. With falling interest rates, and further cuts expected, you could easily lock your money into Bank FDs like we have said before. Here are some attractive bank FD rates for you. These are for a 2 year deposit.
# DBS bank: 11.25
# Karur Vysya Bank: 11.00
# Yes Bank: 10.75
# Karnataka Bank: 10.60
# ING Vysya bank:10.50
# Development Credit Bank: 10.50
5 year deposits also look pretty good with rates between 9.75 to 11 per cent.
Meanwhile, here's another look at what experts are expecting from the year 2009; a view from ICICI Direct.
Smart investor tips from ICICI direct:
# India & China will be key beneficiaries among other Asian economies clocking high GDP growth of 6 per cent-7 per cent and 8 per cent-9 per cent, respectively
# With US rates sliding to 0 per cent, on a risk-reward basis, Indian equities will offering better returns to overseas investors
# Sectors expected to find flavour with investors in 2009 include PSUs, infrastructure, power, pharma, banks, FMCG, auto, and telecom
# Expect sensex to hover between 12000 and 14000 levels by December 2009, considering a P/E range of 12.6 x to 14.7x
We're in 2009; a brand new year with brand new expectations. So, what can you expect? Here's a quick recap.
For investment right away we like Bond funds with interest rate cuts. A Bond fund rally is almost certain. Equity markets - these will take a longer time to recover. If you do not have enough equity in your portfolio, this year will offer the best time to correct that. Buy into well diversified equity funds and index funds. Finally real estate - wait out more. Sometime after March 2009 you could get the best prices - both on the home you want to purchase and home loans.
And that brings us to the end of today’s show. It is a brand new beginning of the year, so get going and get smart. Don’t shun equities; we are much closer to any bottom today than we were a year ago. So where's the worry? Keep you systematic investments in equities going. Take good opportune calls on FDs, FMPs and Debt. Just don’t waste time keeping your money idle in the bank. And till next week goodbye and a very happy new year from the entire team of 30 minutes.