Where to invest in 2017: Indian Retail Investor Perspective

Basic Investment Avenue available for retail investor includes Bank FD, Equity investments, Real estates, Gold. The outlook each asset class is discussed below

Bank FD: Indian Banks are currently offering interest rate anywhere between 6-7.5% for different amount and terms of fixed deposit. Indian monetary policy is in an expansionary environment and I expect central bank to reduce policy rates close to 100 bp (1% from current levels) during 2017. Demonetization has pumped sufficient liquidity into banking system reducing the need for additional deposit in the near future until loan growth picks up. Thus we might see Indian Banks cutting FD rate by 1-1.5% (100-150 bp) during FY 2017, so we might see FD rate in the range of 5-6.5%  for different time period and different amount. Interest on Bank FD is taxable; so we are looking at an after tax return of 3.5%-4.5% for an investor in 30% tax slab.

Equity Investments: Equity Markets have been relatively flat over last two years and performance is as shown in table below:

  

Indian Market	31-Dec-14	31-Dec-15	31-Dec-16	2015 Return	2016 Return
Nifty 50	8,282.7	7,946.3	8,185.8	-4.1%	3.01%
BSE-Sensex	27,499	26,118	26,626	-5.0%	1.95%

Fundamentally Markets would be weak in 2017 and could see strong recovery in 2018: Demonetisation, GST delays, Expected trump policy (IT sector) are going to be earnings dragger in short term (next 2-3 Quarters) while lower interest rate environment (lower borrowing cost),strengthening USD (IT sector) would support earnings, short term fundamentals are weak. However once the reforms are in track we might see strong recovery in earning (due to pent up demand). I being a Modi fan (just to remove ambiguity) believe on going reforms would be positive for the market. I am optimistic as 5 years back the point of discussion would be on scams-2G, coal, defence related but today our point of discussion is tax raids, digitization, and demonetization impact, what would be his next announcement

FII driven market liquidity would further deteriorate in 2017: During 2017, we might witness Fed increasing rates while RBI reducing rates, narrowing interest rate differentials between USA & India would lead to FII outflow in bond market. Trump pro-business policy coupled with short term pain due to on going reforms in India will increase outflow from Indian equities. FII have been significantly selling since Oct 2016 (sold 30,726 Cr in Indian equities) resulting in Broad equity market decline of approx.  6% since Oct 2016. The FII flows trend over last few years is as shown in the table below

FII Investment (INR Cr)	2014	2015	2016	Oct-Dec 2016
Equity	97,054	17,808	20,568	-30,726
Debt	1,59,156	45,857	-43,647	-46,087
Total	2,56,210	63,665	-23,079	-76,813

*FII are net seller in 2016; Size of selling has significantly increased since Oct 2016

Valuations are at appropriate levels: Nifty is trading at 21.9x trailing PE while Sensex trading at 20.88x trailing PE. At 22x PE ,markets are offering 4.5% earnings yield which is better than bank FD post tax return of 3.5-4.5%

Equity conclusion: Equity markets would be a range bound for FY 2017 and another quiet year for Indian Equities. However investors with three to five year investment horizon should start accumulating equity during the year.

Real estate: Central government ongoing initiative to curb black money, Effort to enhance RE transaction transparency, plans of targeting benami properties all bode negative for the sector. It’s a Known fact that Indian real estate market historically has been driven by black money. Property prices are on the higher side offering lower rental yields (max 3-4% across most part of India). I expect real estate prices might hold on at current levels for 5-6 months (however transaction volume would come to grinding halt) and then we might see prices coming down by 15-20% (over next 1 year). Currently the developers who have ventured into projects (pre demonetization) would try to hold on to current rates (so as not to incur losses), Financial position (liquidity & leverage) of the developer will determine how long a developer can hold on to its inventory (without reducing price); but as time passes (say 6-8 months) the inventory holding capacity of the developer will start deteriorating then the real estate prices would start coming down and might see 15-20% decline in RE prices (over next 1 year). Real estate investments are illiquid ,macro headwinds against the sector, investors would be better staying away in FY 2017.

Gold: USD index has gaining significant momentum during H2 2016; considering high likelihood of Fed increasing interest rate during 2017, we could expect USD further strengthening; Gold is inversely related to USD thus we might see downside in gold from current levels. So buying gold for consumption purpose (in terms of ornaments) is fine, don’t look at it as investment asset during FY 2017

Conclusion:

Investors have a challenging year ahead. Bank FD can safeguard your capital but might not generate any inflation adjusted return; Equity markets would be range bound, if you have three to five year investment horizon, then FY 2017 would be a great opportunity for accumulation. If you don’t have time, knowledge or sufficient capital to take exposure to equity, look into Mutual fund route and better to stick with large cap funds/Balanced funds. Stay away from Real estate and Gold.

Happy Investing in 2017; Have a great year ahead and feel free to get in touch with any investment related queries @ smartportfolioadvisors@gmail.com.

Retirement Planning: Balanced Fund Vs Fixed Deposit

Everyone would like to retire financially sound. However majority of the investors would build corpus for retirement over their working years by investing in fixed deposit instruments. FD return most of the times just cover inflation and thus real return (adjusted for inflation) in FD would be 0-2% and returns are taxable.

I advocate balanced funds offered by Mutual Fund Houses for retirement planning. Balanced funds invest in a mix of Equity (generally 60-70%) and bond (generally 30-40%). Equity investments aim at generating capital appreciation, while Bond investments provide capital protection and reduce fund volatility/risk.

Selected Balanced Fund Vs Fixed Deposit (Since Inception)

If an investor had invested Rs 1 lac in BSL Balanced 95 Fund in the year 1995 (at the time fund launch), his worth today would be close to Rs 56.5 Lac when compared to FD worth of Rs 5.03 Lacs; thus investment in BSL Balanced 95 fund would have made you rich by Rs 51.46 Lacs. All the selected funds have generated higher return than the FD in the long run

Selected Balanced Fund Vs Fixed Deposit (Last 5 Years)

If an investor had invested Rs 1 lac in BSL Balanced 95 Fund five years back his worth today would be close to Rs 2.15 Lac when compared to FD worth of Rs 1.46 Lacs; thus investment in BSL Balanced 95 fund would have made you rich by Rs 68,590. All the selected funds have generated higher return than the FD over last five years

Conclusion: Balanced fund with the mix of equity and bond can offer the best from both the asset class. Capital appreciation from equity & reduced risk from Bond. Selected Balanced funds clearly outperformed FD both in the short (over 5 year period) as well as long run (since Inception/fund launch)

Investor’s ability to take risk would be high when they have active income (Employed), higher income levels, longer investment horizon (still has sufficient time for retirement/essential commitment); If your current situation provides you enough flexibility to take risk then you should seriously consider putting your money work for you by investing in Balanced fund instead of FD. Plan well for happy & financially sound retirement

Feel free to place your comment and for any queries related to personal finance, you can reach me @ smartportfolioadvisors@gmail.com.

Indian Equity Market (Sensex) Performance over longer period

BSE Sensex (BSE 30) is a free float market weighted index consisting of India’s thirty largest, well established and financially sound companies. Sensex market cap currently stands close to Re 45 lac Cr (USD 658 Bn).

Sensex indices base year is 1978-79 & started with a base value of 100 in 1 April 1979. Sensex has moved a lot over years and current level stands at 26,101. Thus providing an CAGR return of 16.2% since inception (over 37 years).

Sensex Yearly return Since FY 2001 is as shown in the table below:

Sensex Indices movement since 2001 is as shown in the chart below.

Sensex out of last 15 years; 11 years ended in positive. Sensex CAGR returns since CY 2001 stands at 12.63 % (without dividend yield). Assuming a dividend Yield of 2%, Sensex total return since FY 2001 is approximately 14.63%.

Conclusion: Equity markets have been significant wealth creator over years (CAGR of 14.63% since CY 2001, 11 out of last 15 years ended year positively). Investors by taking exposure to equity markets can make their money work better for them.

To get clarity a Rs 1 Lac investment in 2001 into FD (average return 8%) would have made value of 3.17 Lac over 15 years while same investment would have made value of 7.75 lac (144% higher than FD returns)

Plan your dream with Systematic Investment Plan (SIP)

Mr X gifted a piggy bank to his child and told he would give Re 1 every day. Child was happy to receive the piggy bag and had the desire to buy a board game, so every day as soon as he gets the money from his father he deposited in the piggy bag. As days passed, child accumulated enough money and bought the desired board game.

SIP one of the most decorated term in Mutual fund industry is equivalent to a child’s piggy bank. Piggy bank develops disciplined saving habit in your child while SIP promotes disciplined Investment for creating wealth.

A monthly investment of Rs 10,000 over 20 Years at 10% return can accumulate a wealth of 75.93 lacs. The table below shows wealth creation for a monthly investment of Rs 10,000 over different time period/return combinations.

Monthly SIP of Rs 10,000		Potential Investment Return (%)
		6%	8%	10%	12%	15%
Period (Years)	3	3,93,361	4,05,356	4,17,818	4,30,769	4,51,155
	5	6,97,700	7,34,769	7,74,371	8,16,697	8,85,745
	7	10,40,739	11,21,133	12,09,504	13,06,723	14,71,290
	10	16,38,793	18,29,460	20,48,450	23,00,387	27,52,171
	20	46,20,409	58,90,204	75,93,688	98,92,554	1,49,72,395

For Ex: Assume at the age of 25 Years, Mr X starts a monthly SIP of Rs 10,000 ; Over five years the value of investments would be close to Rs 7.74 lac (say Mr X at 30 years can use the money for equity component of home purchase), Over 20 Years the value of investment would be close to 75.9 Lacs (can be used for purchasing house, kids education, retirement planning)

Conclusion: SIP promotes disciplined investment and a great way to create wealth over long run; An small and disciplined investment over long time can create significant wealth and take care of your dreams. Start small and start early for a great financial future. 

How much should I invest monthly to take care of my child's college education?

College education expenses are essential, sizeable, unavoidable and getting dearer day by day. I like to highlight that the best way to tackle children’s educational expense is to plan as early as possible, follow disciplined investment approach and select appropriate Investment Avenue (asset mix).The steps in planning

1.      Identify how much would it cost today for your child’s planned college education

Depending on your child’s interest, identify the educational stream and the cost of it. The college fee varies depending on the education stream selected. The ball park fees of current college education in India for selected stream is as shown in the table below

Stream	Course period (Yr)	Fees/Year	Total Course Fee
B.Com/BBA	3	50,000	1,50,000
Engineering	4	2,00,000	8,00,000
MBBS	5	10,00,000	50,00,000
MBA	2	5,00,000	10,00,000

2.      Identify number of years available to plan for your child’s college education

Difference between the age at which your child reaches college education (ex under graduation  @ 18/19 years, post-graduation @ 21-25 years) and the current age will provide you the number of years available for you to plan for your child’s college education

Particulars	Years
Age of your child when attaining college (MBBS)	18
Current Age of your child	6
No of years available for financial Planning	12

3.      Compute the future cost of college education at the time your child attain college

Cost of college education has been increasing over years. Assuming an educational inflation rate of 6%; the current MBBS cost of Rs 50 Lac would cost close to Rs 1 Cr after 12 years from now.

Future College Educational Cost = (Current College Educational cost) * (Inflation factor for the required period)

Future Cost of MBBS after respective years
Period* (Yrs)	4	8	12	16	20
Inflation factor @ 6%	1.26	1.59	2.01	2.54	3.21
Future Cost of MBBS	63,12,385	79,69,240	1,00,60,982	1,27,01,758	1,60,35,677

*Period=(Year at which child attain college)-(current age)

4.      Accumulate the required future cost of education through systematic monthly investments over the financial planning years

A disciplined and systematic investment would be able to generate significant wealth in long run as effect of compounding would work in your favour. The table below indicates the future worth of Rs 1 monthly investment done over years

Future Value of Rs 1 Monthly Investment after respective years (in Rs)
Planning Years		4	8	12	16	20
Investment Total Return	8%	56	134	241	387	589
	10%	59	146	276	470	759
	12%	61	160	319	576	989
	15%	65	184	399	789	1,497
	20%	73	233	588	1,374	3,110

*Table Interpretation: A systematic/Disciplined monthly investment of Rs 1 for 12 Years generating 12% return would be worth Rs 319

The Table below provides Monthly investment required for planning your child’s college education (MBBS @ current cost of Rs 50 Lac)

Monthly Investment required to meet future cost of MBBS (in Rs)
Planning Years		4	8	12	16	20
Investment Total Return	8%	1,12,021	59,530	41,832	32,803	27,224
	10%	1,07,495	54,516	36,395	27,000	21,117
	12%	1,03,105	49,830	31,533	22,066	16,210
	15%	96,774	43,396	25,241	16,102	10,710
	20%	86,882	34,160	17,098	9,247	5,157

*Table Interpretation: A systematic/Disciplined monthly investment of Rs 31,533 for 12 Years generating 12% return would be worth Rs 1,00,60,982 in 12 years which can match the future cost of the college education (ex of MBBS)

Conclusion:

Child’s college education is of prime importance for every parent. In today’s term an MBBS would cost close to Rs 50 Lac; it would cost much higher in future and hence calls for suitable planning.

it takes a monthly investment of Just Rs 16,210 (investing over 20 years @ 12% return) while it takes monthly investment of Rs 1,03,105 (investing over 4 years @ 12% return). So planning early will reduce the burden significantly.

I advise everyone to plan as early as possible and given longer time frame, it would be better off to take exposure to equity asset class which has higher potential return over longer period.