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2005: Higher allocation to...? - Views on News from Equitymaster
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  • Jan 5, 2005

    2005: Higher allocation to...?

    The Indian bourses are on fire! They have been achieving newer highs at regular intervals and are currently trading near their all-time highs. Just yesterday, the Sensex reached within striking distance of 6,700 levels by touching an intra-day high of 6,696 points. Stocks with returns of 10%-50% within a week are now common scenario! The economy is in the pink of health and the global investment world has formed a very optimistic picture of India, which has encouraged increased allocation towards Indian equities.

    In this backdrop, with everything working for equities at the current juncture, we conducted a poll on our website with the intention of finding out our readers' stance towards equities in terms of their investment allocation for 2005 considering the indices are trading at their all-time high levels. And the response, as expected, was overwhelmingly in favour of equities with 83% of those who took the poll opting to invest in this asset class for 2005. This was followed by a distant 9% votes for investment in gold while the balance 8% preferred debt/fixed instruments.

    Equities: This asset class has probably received the highest allocation in the last couple of years. And this is, of course, not without reason. The growth prospects of India Inc. are much stronger than it were ever before. The developments over the last couple of years have aided corporate India emerge as a much stronger contender at commanding greater recognition. Further, with improving infrastructure, sectoral reforms and productivity improvements without compromising on quality, all seems to augur well for the economy and the corporate sector. Thus, at the current juncture, we feel that equities will continue to remain a relatively high-rewarding asset class, albeit only over the longer term. However, investors must bear in mind that since equities give higher returns than other investment avenues, the risk associated with investing in equities is also on the higher side as during a 'recession', equities may be the worst affected.

    Gold: With the recent spate of uncertainties (weakening US dollar, oil prices at US$ 50 per barrel and terrorist related uncertainties) cropping up in recent times, there has been heightened interest in this asset class, which aided the upward rise in gold prices in 2004 (about 13% in India). One of the key reasons that investors invest in gold is to counter inflation (where the value of a currency is eroding) as gold acts as a hedge against the same. While we would not recommend a portfolio with significant allocation towards gold, we definitely believe that it should form a part of one's portfolio. However, the percentage of allocation of funds is subject to vary according to different age groups. Considering that gold can be a relatively good hedge against crashing stocks markets and recessional economic periods, some amount of investment in gold would be beneficial in the long run.

    Debt/Fixed instruments:This is a relatively less risky investment option available to an investor. While investing in debt securities may be risky in the medium-term considering that interest rates are on the rise (debt securities have an inverse relationship with interest rates), over the long-term we believe that the soft interest rate bias is likely to continue. However, if we consider the fixed income securities like deposits in banks and post offices, investors could consider allocating a certain portion of their portfolio into these as a fixed return is guaranteed. Also, the safety of investments here is relatively higher compared to equities.

    In conclusion, while the investment option ultimately depends on the risk profile of an investor, we feel that in the current scenario, with phenomenal growth having being witnessed in equities over the last coupe of years, investments in equities should be made only in a systematic and phased manner. Moreover, investors need to stick only to those companies that not only have a trustworthy management, but also a sound and viable business model. As far as gold and fixed income securities are concerned, it goes without saying that these instruments should be a part of the portfolio of any investor depending on the risk profile.



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