It is indeed a strange situation that investors find themselves in currently. The equity market is at its all-time peak whereas the debt market has all but bottomed out.
Normally, it is much easier to chart out the future course of action for any investor as both markets are never at their extremities -- there is ample room for valuations to move either way -- and hence ample opportunity to make money.
However, this time, both the markets, being at the opposite ends of the spectrum, pose a dilemma of sorts.
This is a time when it is vital, almost critical, to use common sense while investing.
For example, there are a large number of investors who may actually still be thinking of taking some equity exposure, now that the markets are booming and there is some money to be made.
Then there are those who have been fortunate enough to have entered much earlier but are still well invested in the hope of making more tomorrow.
If you are amongst any of these, then realise that you are not using common sense. Conventional investment wisdom dictates "Buy low and sell high". All of us know it. How many of us actually act upon it?
If you are one of those who want to buy equity and not be left out totally from the bull run, note that the current level of the equity market is the highest since April 2000.
Since the beginning of the year, the Sensex has risen by almost 60 per cent making it one of the best performing markets in the world. Many stocks are hitting their 52-week highs and some are even at their all-time highs.
What does all this tell you? Two things. One, now is not the time to enter. On the contrary, for those who have stayed invested, think seriously about exiting.
Money in hand is much more useful than just on paper. The second lesson to learn is that markets will continue to behave this way. That is the way markets are.
Peaks will eventually lead to troughs and in turn slumps will also in time reverse direction. All it requires is a bit of patience and conviction.
In other words, those left out this time will get another opportunity sooner or later. Of course, provided they learn from this one. Remember, those who forget history are condemned to repeat it.
So much about equity. Now what about the debt market? Interest rates have bottomed out and in fact in the recent past debt based schemes have actually posted negative gains.
Actually the super-normal returns that debt funds have posted in the last 2-3 years were solely on the account of falling interest rates in the economy.
Interest rates and NAVs have an inverse relationship. When interest rates fall, the NAV rises and vice versa.
However, now that there is a consensus that interest rates will no longer fall further and the market has bottomed out, it follows that returns from debt funds will no longer be as spectacular as before.
In fact, henceforth investors should be happy with market rate of returns -- which the debt funds will definitely yield.
In fact, having to be content with the market rate of returns means some erstwhile favourities, which currently may or may not figure in one's portfolio, have to be reconsidered.
PPF
In the current context, 8 per cent tax-free with an implicit guarantee of capital is as good as it gets. The added tax rebate is icing on the cake.
Even if you are not eligible for the tax rebate (having income above Rs 5 lakh), only the pure interest element makes this investment worthwhile. The only downside is that the maximum investment cannot exceed Rs 70,000 in a year.
Post office MIP
At 8 per cent p.a., with a 10 per cent terminal bonus, the IRR works out to 9.66 per cent p a even without taking into account the Section 80L benefit up to Rs 12,000, which is available on MIP.
At current levels of interest rates, this seems astounding. There is a cap of Rs 3 lakh on single accounts and Rs 6 lakh on joint accounts. Incidentally, the return on KVPs works out at 8.41per cent annually.
RBI relief bonds
There are two options -- 6.5 per cent tax-free or 8 per cent taxable. There is some uncertainty about the availability of Section 80L benefit up to Rs 15,000.
Obviously, if you have no other taxable income, then you should select the latter. However, note that it is possible to earn higher than 6.5 per cent rate of interest from other avenues -- so do not commit all your funds to this one.
Gilt schemes of MFs
Though strictly, these operate like income funds, there is one vital difference. There is no credit risk -- in other words, there is zero risk of any paper comprising the portfolio going bad.
Therefore, these schemes are considered safer than other income schemes but at the same time having the potential of earning higher rates than any fixed income earning avenue.
A word about insurance
As tempting as endowment and money-back policies seem, as investment vehicles these will always be sub-optimal. If you think you are a disciplined investor, it is always better to buy term insurance (which is the cheapest) and earn investment income from other avenues. Buy a policy for its insurance value and not as an investment instrument.
In conclusion
To summarise, as of now do not touch equity. You will get your chance when the market undergoes a correction.
Buy piecemeal at every drop. If you have not already booked profits, the time to do so is now. If not at one go, do it gradually. Do not bother much with the short-term variations in the NAVs of the debt schemes.
Consider a one year time horizon to judge the returns. Going by the current interest rate environment, in all probability, you will earn market or slightly above market rate of returns. This you should be happy with. Do not touch FDs with a barge pole.
The current interest rate on FDs is low and will not even cover inflation. For your fixed income requirement, consider the other avenues discussed above.
The article has covered the gamut of investments that one may consider. Depending upon your return expectations, risk appetite, liquidity requirements and tax efficiency desired, carefully select the instruments of your choice. However, before making your choice keep this checklist handy.
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