While 2009 was an exceptional year for investors in equities and gold, 2010 could be much subdued. Returns from debt instruments, though, are likely to improve.
After the jitters of 2008, there was a lot of good news for investors this year. The positive mood was reflected in the performance of most asset classes.
The Bombay Stock Exchange Sensitive Index, or Sensex, which was languishing at the 8,000 level, more than doubled and looks set to close the year over 17,000. Gold prices continued to break historical highs. Even property prices inched up in the latter half of the year.
The only asset class that gave extremely low returns was debt. According to data from Value Research, a mutual fund research agency, annual returns of medium-term debt funds were a lowly 2 per cent (data as on 30 December).
In fact, investors actually lost money in medium- and long-term gilt funds. The returns were a dismal - 5.17 per cent - the only mutual fund category to post such a poor performance.
For an investor looking for opportunities to invest or realign his/her portfolio, here's some advice on different asset classes.
Equities - Consolidation time
The star among all asset classes this year, - equities - is most likely to take a breather in the coming year. Making money is going to be much more difficult. Vetri Subramanian, head, equity, Religare Mutual Fund, said, "The markets are likely to be sober next year."
Importantly, there could be a shift in focus from large caps to mid caps. "Mid-sized companies are expected to perform better than large caps. Large caps are more likely to give low double-digit returns," said A Balasubramanian, chief executive officer, Birla Sun Life.
Direct equity investors would, therefore, have to follow a bottom-up approach. Selection of stocks will be an important. Stocks with low price-earning ratio and good business models are likely to do much better.
Investors in mutual fund schemes through systematic investment plans (SIPs) should continue their investments. Some of them can book profits from their large-cap schemes (if they have invested for more than a year, they can avoid the short-term capital gains tax as well) and shift the money to mid-cap schemes. But one should look at the track record of the various schemes before doing so.
"Long-term investors should be happy with annual returns of 5-6 per cent over the gross domestic product (GDP)," added Balasubramanian.
While the markets have improved significantly, most are still apprehensive about global events that could have an adverse impact on sentiments. Also, tightening of money supply could put a brake on the rally.
Debt - Improved returns
While returns from debt instruments weren't very impressive in 2009, things could be better next year. Said Rajeev Radhakrishnan, fund manager, SBI mutual fund, "2010 will see volatility but with higher returns."
The Reserve Bank of India (RBI) has already signalled a higher interest rate regime because of inflationary pressures. "Interest rates are likely to go up. RBI may take the initial steps in January itself and continue the tightening process during the year," said Murthy Nagarajan, head, fixed income, Mirae Asset (India).
As a result, returns from liquid, ultra short-term and short-term debt funds could increase to 6 per cent compared with the current range of 4.5-5 per cent.
Even returns from medium- and long-term debt funds could improve. Lakshmi Iyer, head, fixed income, Kotak Mahindra Asset Management Company, said gilt and long-term funds could give 8-10 per cent returns in the coming year.
Further, products like fixed maturity plans (FMPs), which had suffered quite badly after interest rates fell, are likely to make a strong comeback. Already, a number of fund houses, including HDFC and ICICI Prudential, have launched FMPs in the last few months.
However, investors should remember a few changes regarding FMPs that have taken place in the last one year. The market regulator, the Securities and Exchange Board of India, has issued strictures that these can no longer declare 'indicative portfolios' and 'indicative returns'. They will also have to be listed.
In the absence of a robust secondary market for FMPs, exiting could be difficult in the interim. So, investors who are likely to stay put for the entire tenure should opt for such schemes.
Gold: Continues to shine
In the last two years, the yellow metal has given 24.19 per cent annual returns. In comparison, returns from the Sensex and the Nifty have been in the negative territory -7.20 per cent and 7.62 per cent, respectively.
A known hedge against inflation, gold is expected to remain stable in the coming year. Deutsche Bank and Birla Sun Life Distribution Company expect the price at around $1,200 an ounce, or Rs 56,112 (exchange rate of $1 = Rs 46.76), by the end of 2010. "We believe that gold will be reasonably stable through the year. Our 12-month target is $1,200 an ounce," said Pankaj Narain, director and head, private clients, banking and investments, India at Deutsche Bank. It is currently trading around $1,093 (or Rs 51,108.68) an ounce.
Gold does not give phenomenal returns like equity and its price movement slow and steady.Lately, the volatility in its prices has attracted attention. "High net worth investors made pots of money riding on this volatility," said Kanwar Vivek, CEO, Birla Sun Life Distribution Company. But he quickly pointed out that this was a trader's strategy.
For an investor, gold is a necessity in the portfolio. Wealth managers said the metal could account for 5-15 per cent of the portfolio. Due to the volatility, they said it made sense for investors to add gold at regular intervals to average out the cost of buying. The best way to take exposure is through an exchange-traded fund.
"But there are many other gold-related investments that one should look for in 2010," said Narain. One of the avenues is gold mining mutual funds. These funds invest in shares of gold mining companies globally. "This space is becoming important as there is an anticipation of consolidation among mining companies," Narain said.
Property: Wait and watch
The fortunes of real estate and stock markets are always related. In 2008, when stocks markets were in the doldrums, property prices slipped as well.
The beginning of the year was quite bad as global recession and uncertainty among buyers led to low sales. But things have improved significantly in the past few months.
Developers started witnessing a pick-up in sales. Also, purchases by non-resident Indians (NRIs) have helped improve sales further.
Pranay Vakil, chairman, Knight Frank (India), said sales that had happened so far were due to the carry over demand from the previous year. "Many buyers had deferred their decision because of uncertainty on market and job fronts. A large part of that demand came to the market this year because of improved sentiments," said Vakil.
In fact, the pick-up in sales encouraged builders to hike prices. Some hiked rates by 15-30 per cent in metros like Mumbai and New Delhi in the later half of the year. This resulted in resistance from many buyers, according to industry players.
Genuine buyers, who are purchasing to stay, should not time the market as home loan rates are quite attractive at present. Investors in property, though, can wait for sometime.
Experts said the next few months could be crucial. "Things will change around February when buying from NRIs stop. One could get good deals then," said Pranay Vakil, chairman, Knight Frank (India).
Investors in commercial property would do well to wait for a longer period. In many cities, oversupply is leading to depressed prices. Also, industries like information technology and business process outsourcing (BPO), which drive the demand for commercial property, are under pressure because of the hardening rupee.
A better proposition would be invest in a property that is already earning some rent. This would give an idea about the expected returns.