This article was written by Personalfn for the New York edition of India Abroad, a Rediff Publication and an international weekly newspaper.

Three cheers for the Finance Minister! That was probably your first reaction to the Finance Minister's statement that he was restoring the tax benefit on interest earned on NRE and FCNR deposits. Indeed, the Union Budget for 2005  06 has something for everyone, be it the individual taxpayer, the NRI or the corporate sector. Moreover, it has probably started the process of bringing rural India, with its population of about 700 million, into the mainstream of development. It is this initiative which has the potential of pushing India into a higher growth trajectory a couple of years down the line.

But what do these new initiatives mean for you from an investment perspective?

Well, for one, you do not have to worry about paying tax on your NRE and FCNR deposits. This will come as a big relief to those investors who are already invested and also open up an investment opportunity for those with a very low risk profile. After factoring in the earlier proposed tax, the paltry returns offered by such deposits made them an unfeasible option for most investors.

But, as an investor, you should not use this development as an opportunity to further defer the much delayed but essential restructuring of your India portfolio, which is probably heavily weighted towards debt instruments. The skepticism towards equities for most NRIs is understandable given that fingers have been burnt several times over. But there are several reasons for you to consider equities all over again (of course, the allocation in any case has to be in line with your risk profile) 

1. A Sensex level of 6,700 definitely creates the impression of investing in an expensive market. But this is incorrect. If the markets were as expensive as they were in say March 2000, the Sensex level would be 17,000!! We of course are nowhere close to that. At current valuations, the assumption the market is making is that earnings of the Sensex companies will grow at 15% per annum in the foreseeable future. In March 2000 the corresponding number was 40%. This 15% growth estimate is reasonable if not conservative in our view; implying that the market is not irrational in its expectations. This rational expectation leaves room for an upside in valuations going forward, as companies possibly benefit from a better economic environment.
    

2. Valuations apart, recent initiatives by the Government of India to give a boost to the agriculture sector and rural development bode well for overall economic growth from a long-term perspective. Coupled with the strong growth witnessed in the services sector and the rejuvenation of the domestic manufacturing sector in the last several years, higher and more stable economic growth can certainly push India into the elusive 8% - 10% growth bracket. A more vibrant economy will certainly benefit well-managed companies. So even if valuations remain the same, growth in earnings will drive stock prices, thus generating, in our view, a 15% return on your investment over a 3 to 5 year investment horizon. Some sectors, which look attractive from a long-term perspective, include housing finance, cement, software, consumer goods and energy (source: Equitymaster.com).
    

3. Credible research and information is available at a click. You no longer have to depend on brokers, who have a vested interest in getting you to trade (of course not all fall into this category).
    

4. It's easier to track the companies you are invested in due to more regular and credible reporting by them and also easy accessibility to the same.

For most investors though, who do not have the time to research stocks or even track them, equity-oriented mutual funds (equity funds and balanced funds) are the best option. They are also the most tax efficient given that dividends are tax-free and long-term capital gains tax are nil!

The domestic debt markets, on the other hand, have little to offer. If you have recently invested in a deposit or a debt mutual fund, you know what we are talking about. The maximum return that you can expect post tax, without taking undue risk, is about 5% - 6% per annum. Couple this with the possibility of rates edging up, and the risk return scenario changes dramatically making it unattractive for you to lock in money for periods in excess of six month or so. In our view, stick to short-term deposits and debt funds that invest in debt instruments, which offer a floating rate of interest.

Another investment opportunity for you to consider at this point in time is property. The budget did not have anything to say on this but if you have not invested in property in India, it may be time for you start evaluating such a possibility. Says Sorabh Jain, CEO, Mymakaan.com It is preferable to invest in property as compared to other investment avenues like deposits and debt funds in view of the favourable risk return trade off.

Gold has been a long time favourite of conservative investors. Indeed, over the last 3 years or so, it has offered a return in excess of 17% per annum compounded in US Dollar terms (about 14% CAGR in Indian Rupee terms). But if one were to take into account a 5 year view, the return is a more sober 9% CAGR. Given that gold prices ended at about US Dollars 600 per ounce in 1980 and it is presently trading at about US Dollars 430 per ounce it reflects the poor performance of the metal over the last 25 years. But, gold has a place in every portfolio. It is an asset that does not lose its value due to erosion in the value of the local currency. It's therefore a hedge against your local currency- denominated investments. Moreover, given that all of us need gold from time to time (to gift, pass on as inheritance et cetera), having about 5% of your wealth in gold is something you should consider. The Union Budget has proposed the introduction of Exchange Traded Gold Funds. This will make investing in gold a much more simpler process.

To conclude, this is the right time to realign your portfolio in line with your risk profile and needs. And given that the prospects for the markets are better today, you may have more to lose by maintaining status quo than before.

Add Comments