Investing for the next decade... Review on Investing in India

A long stint on other topics & I'm back on a topic of interest for middle aged men- How to make more money. Of course, I’m not a professed expert, but have a few tips which have worked for me so far. Stocks still continue to be high risk, high return, while mutual funds have retained the low risk, medium returns so far. I recently saw a penny stock hit the roof!(550% return in a week)

If you had invested in selected – open ended equity/ infrastructure based funds, you would notice an amazing appreciation of nearly 30/50% in just the past *3 weeks.  *What seemed an impossible target for the year -six months back, is now done with and a new target in the offing. Even after the government introduced a regulatory correction for fund houses listed with other stock trading countries, the mood at the sensex is positive. Last week also saw the biggest fall in the stock market to recover immediately amidst strong fundamentals. Yes, the market would have a lacklustre season during the close of the financial year – February to April as usual, but this year seems to be the best so far for the markets. Keeping all these considerations, I wouldn’t be surprised if the sensex rose a 2000 points a day!. There is now a moving target between 25000 - 40000 for the next 2 years. So if you are planning to invest, you still have a bus you can’t miss. If you are planning to stay invested for a long term, then you know where to plant your surplus.

As the debate over mutual funds and ULIPs rages, let me clarify here. Mutual funds definitely are the ones you need to watch out, even with its disadvantages. Consider you opt for a mutual fund for a lakh rupees, at the end of 10 years, at an average annual rate of 20% you have a value of around 5 lakhs(inclusive of dividends).(20 percent is the minimal expectation of an equity fund). Ulips on the other hand have the advantages of compounding.  The brokerage commissions are huge, but suppose you have invested the same amount annually, the rate of return is around 12-16 percent which would give you a value of 3.5 lakhs average  after compounding(including brokerage commissions) It is a misnomer to say that ULIPS provide better returns since there is no actual barometer. I arrived at these figures after comparing the performance of ICICI/AVIVA and select mutual funds in my portfolio for the past three years. The returns from the ULIP plans are insipid even in a rocking market.(*compared to mutual funds. Check the performance of your insurance plan at least on a monthly basis). Besides, note that the commissions in the initial year is huge.(7.5 - 15% the first month and upto 5% thereafter the first year.  Second year onwards, insurance giants provide commissions of 3%)(For actual commissions discounted, check the rates for different insurance companies). While there is a tax saving on your ULIP, the same can also be obtained from equity based ELSS schemes. Ofcourse, its beside the point to state that you invest periodically in a ULIP.

If you have the confidence to build up your retirement corpus on your own and looking for a long term investment, mutual funds are the best bet with lesser risks associated with the stock market. The keywords when selecting funds atleast for the next 2 decades are

1. Equity/ Infrastructure funds have so far been the best performers in the market worldwide. And it is true for India too. Among other concerns-infrastructure remains the biggest concern and recipient of budgeting in India.

   
   




2. Among the above stated, there are various concerns – mainly a 3 or 5 year lockin period. Close ended funds remain poor performers inspite of a very *big * bull run. These funds appear to lock their investment in particular stocks, or even if they aren't, the returns do not seem to indicate otherwise. Opt for open ended funds (A comparison of any close ended fund can be made by its indices with open ended funds at sites like moneycontrol.com)

   
   




3. It does not make sense to opt for SIP in equity/infrastructure funds especially in a bull market. A lumpsum gives you the best returns. The past three years, inspite of the market corrections and downslide for a few months, it still didn’t make sense to opt for SIP. SIP gives you a higher cost, so opt for it when you foresee a significant expenditure and want to keep your investment to a minimum.

   
   




4. Ofcourse, the returns offered by an existing fund and a new offering is another story. There are a few funds which continue to average excellent returns. There are a few existing equity funds which have been lacklustre during the past weeks. And there are definitely new funds which have provided excellent returns. One barometer here is the stocks the fund invests in the initial months. The best example is ABN Amro's Future Leader's fund and Tata Infrastructure fund. ABN had a very bad start(the market fell for 6 months) while Tata had a simply marvellous start during the initial months. And while both are not in the same category, I believe ABN could have doubled its returns if they had just stayed put for a month! Here is where the fund manager comes into the picture. The amount of research involved also is displayed. Under such circumstances you can check the past performance of a fund manager. Mutual funds can subscribe without investing  the money in the markets(once the fund offer is subscribed and closed) for upto a month.

   
   




5. If the inflow continues to be around 20 billion or more, then the rate of return would be around 30% plus every year. However, if it tapers to less than 5 billion, the rate of return would still be around 20 percent. Of course the investment made in an Indian stock is taxable. So if a foreign fund house is still willing to invest in the Indian market, inspite of the 33% tax on profits(and the registered with respective countries stock exchanges rule), then they must be *very *confident of the Indian market’s capabilities of maintaining bulls.

   
   

6.  Short term is a period of 1-2 years.  Medium is 3-4 years. Long term is 5 years and above. Retain your mutual funds for a 10 year period atleast. If you want to shortsell to cover finance shortages, sell the least performing fund, not the one giving you the highest consistent returns.

Note- While there is a default fee for not paying your credit card or ULIP installments, that is not the case with mutual funds. You are not charged in case you are unable to make a payment.(norm followed by most fund houses). A few fund(DSP) houses stop debits till you renew the SIP option again while a few ignorie the skipped debits(Reliance) while keeping you updated.

• Rate of return of mutual funds and ULIPS have been taken on selected investments. For ex., I have compared the returns averaged for the past three years for open equity/infrastructure based funds and ICICI Prulife /AVIVA(Growth) as I hold these policies. The 10 year period has been calculated on the minimum yearly return.

  
  




• All above points are my personal opinion and insights. what holds good for me may not necessarily be the case for you. Think and invest independently after financial consultations….