The Index of Industrial Production (IIP) has been witnessing sharp swings in both the direction since the month of October 2011. IIP for the month of January 2012 came in at 6.8% up from 2.5% (revised upwards from 1.8% estimated earlier) in the previous month. Moreover, the IIP growth for the month of October 2011 was revised downwards to -5.0% from -4.7% estimated earlier.
 

(Source: CSO, PersonalFN Research)

The sharp up move in the IIP was led by the following:
 

• Manufacturing index, which constitutes about 76% of the industrial production, displayed a robust growth of 7.86% in the month of January 2012 (as against 2.5% (revised upwards from 1.8%) in the previous month).
   
• Consumer goods index leaped to 20.2% in the month of January 2012 as against 10.2% growth in the previous month. It is noteworthy that the items contributing to this robust consumer goods growth include 'Zarda / Chewing Tobacco', 'Marble Tiles / Slabs', 'Newspapers' and 'Pens of all kind'.
   
• Capital goods index once again couldn't post a positive growth but improved as it registered a negative growth of -1.5% in the month of January 2012 as against -16.3% in the previous month. We expect the capital goods index to improve further with the RBI hinting at repo rate cuts which will ease the interest rates in the country and ultimately reduce borrowing costs for companies.
   

Our View:

Though the IIP numbers posted a surprisingly robust growth numbers, it was mainly led by the stupendous growth in the consumer goods index. Unfortunately the growth in the consumer goods index was mainly led by 'Zarda / Chewing Tobacco' (very harmful for one's health). If the IIP growth has to sustain the uptrend and overcome the 'see-saw' mode, important constituents like the manufacturing index and capital goods index need to deliver.

Moreover, the robust IIP growth may preclude the RBI from reducing the repo and reverse repo rate at its upcoming fourth quarter mid-review of monetary policy to be held on March 15, 2012. We expect the RBI to start its rate cuts from the month of April 2012 and maintain its status quo on March 15, 2012.

 

What should equity investors do?

The Indian equity markets are resilient in nature and have potential for a robust future growth. Investors in equity should adopt calm and compose approach and stay invested from a long term point of view.

However, as fears of downbeat economic data being disseminated from the Euro zone still remains, staggering your investments would be an appropriate approach. We recommend that you invest in diversified equity funds as this will help reduce risk. However one should stay away from U.S. or Euro oriented offshore funds in such a scenario, and instead look at investing in diversified equity funds. Ideally you should opt for the SIP (Systematic Investment Plan) mode of investing as this will help you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding .

Remember, while investing select only those equity mutual funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.

 

What should debt investors do?

Well, we think that the current situation is attractive to take exposure to debt mutual fund instruments as interest rates are likely to consolidate at these higher levels before they start going down.

You can now gradually take exposure to pure income and short-term Government securities funds. Since longer tenor papers will become attractive, longer duration funds (preferably through dynamic bond / flexi-debt funds) can be also considered, if one has a longer investment horizon (of say 2 to 3 years). However, one may witness some volatility in the near term as there is always an interest rate risk associated with the longer maturity instruments.

With liquidity in the system being tight (atleast till the advance tax payments in mid-March 2012), yield on the short term instruments is expected to remain high thus making short-term papers attractive. Hence investors with a short-term time horizon (of less than 3 months) would be better-off investing in liquid funds for the next 1 month or liquid plus funds for next 3 to 6 months horizon. However, investors with a medium term investment horizon (of over 6 months), may allocate their investments to floating rate funds. Short term income funds should be held strictly with a 1 year time horizon.

Fixed Maturity Plans (FMPs) of upto 1 year would continue to yield appealing returns and can also be considered as an option to bank FDs only if you are willing to hold it till maturity. You can consider investing your money in Fixed Deposits (FDs) as well; at present 1 year FDs are offering interest in the range of 7.25% - 9.25% p.a.

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Comments
michael.kasch@t-online.de Mar 24, 2012 If that someone means for you to prosaically buy mortgages, forget about it, too much trouble to collect, let the pros handle it. Thornburg Company (TMA) is (in my and others opinion) the best managed company in the business. Year after year, when others were reducing dividends due to reduced earnings, TMA was churning out 10% plus in dividends per year and seeing an increase in their stock price. Now I am getting 14.7% yield on my original investment. For a less risky investment, a mutual fund is the way to go. Vanguard GNMA Fund is among the best (again, in my opinion, and the opinion of many employees and customers of Vanguard). But just don't take my word for it, do your own research.
sabie.mqhane@uct.ac.za Mar 24, 2012 Best advice, if you don't understand what you are investing in, no matter how good of an investment it is for someone else, it is probably too risky for you. Investing entails buying notes at a discount from holders of those notes. You get a decent return in the interim and sometimes a windfall when the note is refinanced early.Takes a lot of work chasing the leads down and you have not diversified your risk if you only own 1-2 notes. Involuntary investment in real estate(through foreclosure) is almost always a bad thing.Stick to things you understandor find people you have confidence in who understandthose things.

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