Investing in low economy times

If 2008 was the year that witnessed an unprecedented crisis of confidence, 2009 could be one of re-building confidence among market participants.

With inflation coming down, leading to lower interest rates, several blue chips are at multi year lows and insurance companies are showing a marked shift from unit linked plans. The year is sure to throw up interesting long term investment opportunities for investor. And gold the asset class that truly transcends geo-political boundaries could be the one to bet on heavily. Along with the southward movement of interest rates, debt has emerged as one of the top investment opportunities.

For retail investors, investing through debt mutual funds early in the year could turn profitable. People in the higher tax bracket should invest through bond and income funds and for at least 2-3 years. However, for those in the lower tax bracket, bank fixed deposits are usually the preferred investment option.

But, bank FD rates are also headed south and are expected to keep falling as long as banks keep reducing their lending interest rates. With the development of a robust corporate debt market on track, individual investors could expect to start participating in the debt market directly.

The linkages between the debt, spot and derivatives market for foreign currencies, and a market for interest rate derivatives are very strong. This should provide some liquidity to the corporate debt market, which might create opportunities for retail investors who do not want to go through the mutual fund route.

In 2008, investors lost money in shares. But 2009 could be the year of long term investors with some large cap stocks now available at over 90% discount to their 2008 highs. These stocks have moved from the exclusive large cap area, past the mid cap range, are now resting in the small cap segment. Yet, market veterans expect stock prices to decline further from the current levels once corporate results start coming in from January second week. So the right time to invest for the long haul could well be after that.

The good bets are those frontline companies from each sector that are India centric. .Among those expected to give better returns are PSU, Auto, FMCG, Pharma, Power and Telecom companies. Once the cycle starts turning banks will be off the block first. Capital goods and power companies would follow. And with the government stimulus packages in place, infrastructure companies are expected to do well.

The life insurance segment is sure to witness a sea change during the New year 2009. During the bull phase insurance companies sold and buyers mostly bought ULIPs where returns are fully linked to the market.

But, in an uncertain market, these products are turning out to be patently bad ideas. Insurance buyers, having burnt their fingers in ULIPs, are now looking for capital protection and assured returns.

Even now in ULIPs the insurance buyers can always give an option for spreading out investment keeping the equity component at the minimum. When things are good they (insurance buyers) can switch over to a higher percentage of equity.

For individuals seeking fresh investment it may be prudent to invest in first class banks’ fixed deposits until the next one year or so. This may not be the time to play with risk ridden investments.

Investors who wish to park large funds in some short term avenue until they decide how it should be allocated among various asset classes find fixed deposits ideal. This is because it enables them to enjoy better interest rates as compared to a savings account while their capital remains intact

Moreover, there is greater flexibility in terms of the maturity periods on offer, ranging from a week to up to 10years. For those who formally perceived fixed deposits as illiquid, the availability of overdraft facilities has brought about a change in perception. Loans can be availed against these deposits while interest continues to be accrued. Further, with facilities such as sweep-in-sweep-out accounts on offer, liquidity no longer is a major concern.

Retired Investors:
Senior citizens enjoy higher interest returns on fixed deposits than others. For instance, Bank of India offers a 0.5% higher returns than card rates on deposits of maturity periods of 6 months and longer to senior citizens. State Bank of India has revised its slab as follows: Fixed deposits also offer a regular stream of income through the options of receiving interest on a monthly or quarterly basis, as per requirements. Moreover, with no or less taxable income, FDs can be a tax-efficient method of investing.

Tax Savers:
Certain fixed deposits are entitled to income tax exemption up to a limit of Rs1lakh, under section 80c. These deposits should be locked in for a period of five years to qualify for the benefit and no withdrawals before maturity are permissible. With financial markets evolving continuously, a new-age investor, who considers fixed deposits as plain vanilla products with implied generation gap in their offerings think again. There’s something in it for everyone.