After showing some promise at one stage, 2013 has finally turned out to be a disappointing year for savers and investors. It had some serious scares, some rather half-hearted landmarks but eventually, it left us waiting, a little nervously, for what 2014 holds. There are times when one is just waiting for something to happen. Weeks and months pass by and we're just marking time, often not knowing how long will something take.
In some ways, 2013 should have made equity investors happy. After all, the Sensex and the Nifty hit new highs after five years. In the decade past, we've been conditioned to greet new highs of the benchmarks with great joy. However, there was none of that this time. The new high point came too long after the previous one, and proved to have no sustaining power.
Universal Gloom
What mattered to savers and investors was the universal gloom. Whether you were invested in equity or fixed income, or even gold or real estate, nothing gave any real returns. At a time when even the official rate of consumer inflation is running well above 10 per cent (and the real rate much higher), nothing made money. Looking at things broadly, the average return of all equity funds is 4.75 per cent and the return of an index like the BSE 500 is 3.2 per cent.
Looking at different categories of funds, good returns are few and far between. The handful of technology funds have done extremely well, more than compensating for a couple of bad years they've had. The category's average returns for the year are 52 per cent, with even the rearmost fund giving returns of 40 per cent. The turnaround in investors' perception of technology companies' fortunes has obviously worked wonders. Somewhat similar is the case of the pharma sector, where the handful of funds generated 20-plus percent returns.
The only other type of category of fund in Value Research's database that has double digit returns are international funds, but more on that later.
Fixed Income Comes Unhinged
While equity investors can still take a long term view and think that eventually they'll make much more, fixed income investments do not have that excuse. Fixed income investments must always give a decent return. Moreover, this return must be 'real', that is, it must be more than the rate of inflation. However, 2013 saw an all round failure from fixed-income investments. Firstly, all instruments delivered less than the inflation rate. Secondly, in July, when the US Fed first announced its tapering, fixed income funds had a crisis. Bond prices fell dramatically and very briefly, all funds--even liquid funds--registered a drop in the NAV. This was an unexpected shock for investors who've always thought these funds to be proof against even a single day of losses.
Gold Decline
Gold ended with its worst year since 1981. The international price of gold is down 28.28 per cent since 2013 began. This is it's worst year since 1981. Is the gold mania over? It certainly looks like it, although in India the plunging rupee and the government's increased duties meant that the loss was not all that severe. The domestic price of gold was down 7.8 per cent in the same period.
However, with the rupee stabilising and the government determined not to reduce duties, Indian gold prices are now tracking international ones. In fact, if curbs are lifted and duties reduced, Indian prices could fall more than international ones. Since its peak in September 2011, gold is down 35 per cent internationally. Value Research has long maintained that gold had a one-time boom during the last decade. Fundamentally, gold is a poor investment and will remain so.
Global Delights
Given India's external sector weakness, along with our high inflation and interest rates relative to the US Dollar, it is likely that the rupee will continue to get weaker. This might sometimes happen in fits and starts and sometimes steadily, but the basic trend will remain true. What this means is that all sensible investors must have some exposure to international funds. In this regard, investors would do well to look beyond the category average of 13 per cent returns that the Value Research International funds category has.
Much of this category is made up of exotic thematic funds which are not suitable for anyone. Investors should focus on mainstream diversified equity funds that focus on the US and other developed economies. Such international funds have returns of well above 30 per cent over the last year. Examples include FT India Franklin US Opportunities, Motilal Oswal MOSt NASDAQ-100 ETF, ICICI Pru US Bluechip Equity, DSPBR US Flexible Equity, and Birla Sun Life International Equity.
Looking Ahead to 2014
Most investors expect the 2014 general elections to be a big agent of change and since investors are by nature an optimistic lot, we expect the change to be positive. At this point of time, this expectation generally takes the shape of an NDA government led by Narendra Modi. Of all the possible political configurations in India, a Modi-led NDA government would be most growth-oriented. However, it's by no means certain that such a government would actually be formed.
India's polity has always been a fertile ground for socialist-leftist ideas that prioritise big expensive promises and spending over growth that could finance that spending. The ease with which the AAP has gained ground is fresh proof of this. It's entirely possible that May 2014 could see a dysfunctional coalition coming to power that could make the UPA look like a model of action and good governance.
However, that's not to say that mutual fund investors should follow some special strategy based on what they think will happen on the markets. Markets are uncertain even at the best of times and we always recommend an approach that can be followed without regard to the events that could happen.
Here's our investing strategy for 2014, which is the same as it has always been: Take a look at your own life and try and make a liberal estimate of how much of your savings you would need to tap into over the next five to seven years. This would include some sort of an emergency amount, plus predictable big-ticket expenses like weddings, education, the down payment on a house and such things. This is the amount you should hold in debt investments which could be anything from PPF to short-term debt mutual funds. The rest should be in diversified equity mutual funds with a good long-term track record. Any fresh investments into equity funds should be done gradually and continuously regardless of the state of the markets. Don't invest in too many funds--four or five is enough diversification.
Much could possibly change during 2014. On the other hand it's possible that nothing could change. It could change for the better, or for worse. However, there's would be no need to change this investment strategy. And that's the way it should be.
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