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Bet on the long term...

Mar 24, 2005

What's with the markets? That's what most of us investors would be wondering. At first, they continue to break new highs after new highs, and then they fall as if there is no tomorrow! But then, let's not forget the laws of gravity: 'what goes up comes down and vice versa'. To be fair to the readers of this column, they have been bombarded with caution, a longer-term outlook and toning down of return expectations, continuously. It is not really going to be any different today.

It is very clear now that Indian indices dance to the tune of Foreign Institutional Investors (FIIs) movements. And they in turn, take a stance based on what Mr. Greenspan's outlook of US rates is. And currently, the bets are on US rates rising faster than expected. If that happens, obviously some of the foreign funds may like to park funds closer home with less risk. But if such is the case, investors should continue to see the markets fall and therefore, should beat a hasty exit.

In our view, there is no reason to panic. Atleast not for those who invested in Indian equities with a long term view (see we told you, it's not going to be different). We believe that India continues to occupy a key position in the FII radar. Structurally, the economy is headed in the right direction barring some misgivings. Banking reforms seem on, FDI in telecom, insurance and construction is in, talks are on for pension reforms, patent bill is through, infrastructure focus continues and more importantly, India Inc. continues to thrive in competition and is more outward looking than 5 years back. India is a big economy and moving slowly but surely in the right direction. In that sense, we need not overtly worry about attracting foreign investment to Indian equities.

Another key positive is the push towards building an equity culture in India. In our view, the tax benefits to equity investors are attractive. Dividend is not taxable and any capital gains (if you hold on for 1 year or more) tax too is zero. Compared to other avenues, this is surely a big draw in the longer term. With the FM freeing up the Rs 1 lakh limit for investors to choose from different avenues, equities could see a sizeable allocation going forward.

India Inc. is likely to sustain its growth momentum in the medium to long term. Therefore, equity investing is likely to give a decent 'inflation' beating return in the long run. Happy investing!

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