MUMBAI: It's not been the easiest of years for financial planner Gaurav Mashruwala. He had to constantly assure his clients that they should not panic and change asset allocation.
After all, when the Nifty returns four per cent (till December 16) and gold turns negative after a spectacular run for 12 years, investors are likely to panic. Even real estate, the recent favourite of investors, showed some cracks. "This year was one of the toughest, as we had to constantly address clients' concerns about their investments," says Mashruwala.
Amar Pandit, a financial planner, says hand-holding was required because of the negativity and spate of bad news. "The thought that we had to emphasise was to focus on things we can control and to not let emotion come in the way of taking rational decisions. There was no better year to follow the 'plan, process and product' approach than 2013, " says Pandit.
WHAT TO WATCH OUT FOR IN 2014
Start investing in equlities, since 2014 is likely to see secular rally
Given that interest rates will start going down, invest in short-duration funds
Outlook cloudy for gold; US tapering will add to the woes
Real estate cooling off has started in some markets
The decision also had to be tactical. In bad times, some savvy investors get solid opportunities. For example, when banking stocks were hammered in August, there were mouth-watering investments (at excellent valuations), which have provided abnormal returns of 35-50 per cent (absolute) in two-three months. "Hence, the strategy was to also take advantage of tactical calls like this (select banking stocks), while maintaining one's strategic asset allocation," adds Pandit.
However, 2014 is likely to be a better year, say experts, especially if the election results are positive for one party instead of throwing up a hung parliament. Some experts are already throwing their weight behind equities. For example, Sunil Mishra, chief executive of Karvy Private Wealth, says investors should start moving towards equities because the rally is likely to be more secular in 2014. Unlike this year, when select sectors such as information technology and pharmaceuticals pulled up the benchmark indices to all-time highs, while others suffered. "The impact of the US tapering has already been factored in. In addition, there has been a fall in the prices of oil and gold. It is time to shun the aversion to equities. Good stocks will be rewarded,'' he says.
Apart from these factors, equity markets will also benefit from currency stabilisation, a revival in the rural economy driven by a strong monsoon and a global growth recovery.
According to Ajay Bagga, head, private wealth management, Deutsche Bank India, the worst could be over for emerging markets, including India. "We expect some reforms, like foreign direct investment (FDI) liberalisation, which may improve the investment sentiment early next year. A better current account deficit (CAD) will help India withstand concerns emanating from the tapering of quantitative easing by the US Federal Reserve. Inflation will remain elevated for the first six months but we don't see any major liquidity tightening ahead," he says. In fact, Deutsche Bank predicts GDP growth for India at 5.5 per cent in FY 2015, as compared to five per cent in FY 2014.
What helped investors in 2013 were debt instruments, especially shorter-term, lower-risk asset classes like money market funds and short-term funds, which performed better than riskier asset classes like equity. There were also some high-yielding debt opportunities like tax-free bonds (which gave returns of over nine per cent) and company fixed deposits. But 2014 might not be the year of high interest rates. However, there is still opportunity in some debt instruments.
Bagga's advice to investors is to take advantage of the current elevated rates and invest in short-duration funds which will have a higher carry and lower volatility.
Tax-free bond issues are another opportunity to lock in long-term returns at the current high rates. In fact, use a systematic withdrawal plan to invest in equities. In which case, you can deposit a bulk amount in a debt scheme and move money to a good equity fund on a monthly basis.
Ashish Shanker, head, investment advisory, Motilal Oswal Private Wealth, is expecting things to improve as inflation will come down: "Inflationary pressure will begin to come off once the benign effect of a better agricultural output starts showing, thereby building a case for the Reserve Bank of India to maintain a soft interest rate regime."
Shankar expects equity markets to deliver 8-10 per cent, fixed income to deliver 13-15 per cent and gold to be almost flat in 2014. "On the fixed income side, we are bullish on duration-based strategies. Hence, we would advise investors to add duration and build equity portfolios on any market dips. Gilt funds and dynamic bond funds are good options to take advantage of the duration strategy," adds Shankar.
Unfortunately, the 'golden goose' might not continue to behave the same way. Gold, one of the most popular asset classes, had a negative return year. The performance of gold would have been worse if the rupee had not fallen. The outlook continues to be cloudy for the yellow metal.
The US Federal Reserve's tapering could pose a downside risk to gold prices. It is likely to face challenges in 2014, since the dollar is expected to resume its long-term cyclical uptrend, says Bagga.
"Our model portfolios recommend investors to have around two per cent exposure to gold,'' he says.
The tricky part will be real estate. With marginal price appreciation and a wait-and-watch attitude by investors, there is definitely pressure on builders. But as usual, some areas might continue to do well, while others suffer. This is one asset class where a cooling of prices gave good discounts and an investment opportunity to investors. However, the cooling has happened only in select markets and prices are still overheated in others.
According to the National Housing Bank's Residex, between January and September (the latest available data), prices have declined in 18 of 26 cities. In Delhi, the index fell from 202 in January-March to 190 in July-September. In Bangalore, it has fallen from 109 to 107. In Mumbai, it has been flat at 222. In Chennai, it has increased from 314 to 318.
In 2013, your household budget was a mess due to high inflation and interest rates. Worse, investments made little or no money. But it was also a lesson for investors who overexposed themselves to a single asset class like gold. To stay safe, follow an asset allocation and invest regularly.