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The Hows & Whats Of 2012

We can’t predict how investments will fare in 2012, but as far as investment strategies go, nothing changes from the strategies of 2011…

This short article is about investing in 2012. Actually, that doesn’t define the subject with enough precision. It could be about how investments will do in 2012; or, it could be about where to invest in 2012. Those are two different things.

About how investments will do in 2012, frankly, I don’t think it’s possible to make a prediction with any degree of precision. To anyone who is a knowledgeable and aware, and that would definitely include readers of this newspaper, the business and investment landscape would be familiar. Indian equities are looking decidedly downtrodden, but that’s not to say that they can’t be trodden upon even more. Declining corporate profits, worsening government finances, high interest rates and the constant overhang of further drama in Europe could well make things even more difficult in the coming year.

Indeed, the mood d’jour among the investment and business community is one of extraordinary pessimism. However, it’s entirely possible—I would say even probable—that this pessimism has now moved from being a rational response to real problems to being a sort of an irrational melancholy—the opposite of Alan Greenspan’s much maligned irrational exuberance.

One can only hope that this pessimism does not become self-fulfilling prophecy, which can easily happen. Among business decision makers as well investors, a widespread expectation of bad news will itself become the cause of bad news. My guess is that sooner rather than later—certainly, long before 2012 ends—there will be a change of perspective. Investors will start paying more attention to how reasonably-priced investments

At this juncture, one should step back and take in India’s economic history in large, ten-year swathes. If you select any ten-year period in the last forty years, there has always been a vast improvement. Were things better in 1970 or 1980? The answer is obviously yes. 1990 or 2000? 1984 or 1994? 2000 or 2010? It’s the same answer every time. When you stand back and take a ten-year perspective, the forward surge of Indian economy and businesses is always obvious. Certainly, some ten-year periods are better than others but the situation never regresses. Some might say that a ten-year period is too long, but that’s not much longer than what would qualify as an appropriate period for a long-term equity investment.

Now, it’s possible in theory that the next ten years will be different and the country will be much worse off in 2022 than it is now but I wouldn’t give too much to the chances of this happening.
That’s as far as the general investment environment goes. As far as the actual investment strategy for the individual investor goes, that’s no different for 2012 than it was for 2011 or for any other year. Investors should keep money they might need over about the next two years and keep that in fixed-income options like government small-savings schemes or debt mutual funds. Everything else that is for the longer-term should be invested gradually into equity-backed funds. The best way to do this is to choose a small number of balanced and/or diversified equity funds and invest through monthly SIPs. It’s a simple and effective strategy, and has the advantage of not changing from year to year.