Financial Investments

The buoyant year offered important takeaways for the small investor. I can conclude at some key lessons.

Stocks fell, bonds rallied, gold shot up and foreign markets fared better.

Diversification really works

The biggest lesson of 2011 is also the oldest. It found a forceful reinforcement as the investors, whose portfolios had a wide spread across asset classes, sectors, or even geographies, reaped benefits. In equity funds, diversified plans fared better than some sectorial funds (infra, banks).  India is considered to be among the top performing markets, but in rupee terms, it was among the worst performers in 2011.

Insure against natural disasters

Most of the damage in Japan was paid for by insurance. This stresses the need to cover life, property and health. Even though the cost of insuring a house for Rupees 24 lakh is only Rupees 5 a day, not many Indians have covered their houses against disasters. Covering the contents of the house is a little costlier but equally important. The cost far outweighs the benefits of insuring your valuables.

Stay away from easy money plans

Those who had flocked to Speak Asia to fulfil their dreams are today ruing their decision to join the company. The online survey company has not paid them any money and there is no telling whether it will be allowed to resume its operations in India. Many experts saw this coming much before the authorities clamped down on Speak Asia for being a pyramid scheme. For small investors, the lesson is simple: stay away from schemes that offer easy money. Remember, there is no short cut to riches. Only diligent saving and intelligent investing can get you there.

There’s nothing wrong with promoters pledging their stake as collateral. The trouble is if they pledge a large chunk of the equity. Bear cartels are forever on the prowl for such firms, for even a good stock can go into a tailspin if a big portion of the stake is pledged triggering a sell off. Take the case of some stocks that have fallen drastically by almost 90% when rumours of pledging first surfaced. Another oil company is another horror story. In November, another share crashed 50% as panicky financiers off loaded.

For property buyers, government approval for a project is practically a touchstone. The imbroglio over Noida Extension has changes this perception forever. After the Allahabad High Court struck down the acquisition of land at Greater Noida, government projects will no longer be seen as risk free. Fire Capital CEO Om advises buyers to invest in projects that have an institutional participation. It’s safer as banks and financial institutions exercise due diligence for the project

At the beginning of the year, banks were luring deposits with rates of 8-8.5%. Anybody who clocked in at that rate would have lost out when the rates touched 9-9.5% even 10% for certain durations. On the other hand, investors in short term debt funds gained from the rise in interest rates. Debt funds are liquid and more tax efficient than FDs. Now that the interest rate cycle has peaked long term debt funds look promising. Investors need to look beyond FDs for debt investments.

Inflation in your returns:

How much did you earn from your FD this year? Even for someone in the Zero tax bracket, the return would not have been more than 1-2%. This is because the high inflation that raged in 2011 would have pared the real returns. Investors should not get carried away by the rate being offered.

While a small investor can’t control the rise in prices, he can control his expenses. If you have a financial plan, it tells you when you overspend or under invest.

Diversification has limited utility if you don’t rebalance your portfolio. 2011 was a year of divergent returns from different asset classes. Stocks fell but fixed income options gave good returns and gold shot up. If one asset class runs ahead or lags, the investor must periodically reset the balance. This disciplined approach holds the key to successful investing. The investors who maintained their asset allocation emerged relatively unscathed.

Investors small or big must study the scheme or stocks thoroughly and then put their money. In stock markets sometimes the stock may go low but the investor should not withdraw his funds. Moreover he or she should be prepared for 3 to 5 years of investment.