Investment returns likely to be muted in 2015

There was a time when people ran away from a sher (tiger) and now people are running after shares," declares an actor in a play recently staged in the Capital. The audience claps in glee. Many seem part of the two million - and counting - new entrants to the world of stock markets in 2014. The 'Retail Rush' has begun and more and more Indians now finally want to grab a piece of the India growth story pie, after having sat out for the better part of the last decade.

Not surprising after the stellar performance of the stock markets in 2014, driven almost entirely by the surge of hope after the spectacular victory of Narendra Modi in May 2014. The party had begun earlier, in late-2013, once Modi had been declared BJP's PM candidate. While the broader BSE Sensex was up 25 per cent in 2014, many individual stocks and mutual fund schemes gave returns in excess of 50 per cent. Debt mutual fund schemes, which invest in bonds, too, gave hefty returns as infl ation came under control and interest rates began to come down. Cocktail conversations were back to "how much did you make?" At the same time, two asset classes we Indians love - real estate and gold - remained moribund. So, how will 2015 be? Where should one invest this year?

The year 2014 was one of hope. So, expectations remained high. The year 2015 is one of reality. Returns will be muted. And expectations would have to be reined in.

Experts say a large part of the equity returns of 2014 had to do with the re-rating of India. A stable government for the fi rst time in three decades led by Modi, who came to power on the plank of injecting growth into the stalled economy, led to investors willing to peg a higher value to the Indian stock markets. Stock markets are futuristic; imminent growth in the economy is what led to the sharp rise in the stock markets through 2014 even though corporate earnings remained sluggish and did not take off.

The bounceback of the economy has now been factored in and 2015 will see stock markets driven by a change in the fundamentals of Indian companies. Experts say corporate India's earnings will likely remain sluggish for the next three-four quarters and will bounce back in 2016/17. In 2015, equity returns are likely to be in line with corporate earnings that are expected to rise 5-15 per cent. So, to expect a repeat of 2014 in equities in 2015 may not be prudent for investors. Moreover, the stock markets are likely to remain volatile and may even see bursts of correction. And yet, this may well be the time to tank up on your equity portfolio and wait to see good returns over the next two-three years.

Bonds, which too saw strong returns far outstripping returns from bank deposits, will be more muted in 2015. For one, infl ation has come down. And interest rates, too, have been cut, and are expected to go down further by up to half a per cent over the course of the year. This impending cut has been factored in by bond markets. Bond returns have an inverse relationship to rate cuts and fall in infl ation. Most of the bond returns story has already played out. So, while returns are likely to be better than bank deposits, they are unlikely to beat returns by a mile.

That brings us to the asset classes that we Indians have always loved traditionally. The attitude towards real estate is undergoing a tectonic shift. Investors, who for long remained confi ned to this asset class, are doing a rethink. Property prices have remained sluggish and have seen sharp falls in some pockets. One estimate says only about 15-20 per cent of real estate projects are running on schedule, and rampant delays in project delivery are beginning to put off investors.

To top it all, the renewed push to crack down on black money has meant more and more people becoming wary of investing in an asset that has for long been the haven for black money. The absence of a regulator (the Modi government has recently approved bringing in legislation) has meant a large number of unhappy customers. Real estate prices are unlikely to rise in 2015 in most pockets; some cities and areas may see a rise but these are few and far between. So, if you want to buy a house to stay in, this year may be better than any to make that purchase.

Gold, too, has not given infl ation-beating returns for the past two years. With Indians being the biggest buyers of gold, which is almost entirely imported, its pricing power rests in global markets. A 10 per cent duty means you are starting your investment on the back foot. Moreover, with interest rates likely to rise in the US and economies of developed countries on the mend, experts say gold returns will remain muted and may not be able to beat infl ation in 2015. Most fi nancial planners say no more than 5-10 per cent of your portfolio should be in gold.

One big change that the recent Budget brought is the push towards the National Pension System (NPS). Significant tax sops have been extended to this government scheme. It allows a higher allocation to equity unlike EPF and PPF, but its returns are taxable, unlike PPF and EPF - and even unlike balanced equity mutual fund schemes, where the returns are tax-free after a year. NPS is the cheapest scheme in terms of costs, but its distribution has been nothing short of a disaster. Given the low rates of commissions, banks aren't enthused to sell the product and you may need to struggle to buy it. Making the effort would depend on your tax bracket and doing a return-versus-tax-saving assessment with your financial planner.

It is important to see 2015 as a launch pad for your investments. The rules of prudent fi nancial planning remain the same. Asset allocation is paramount. So, go out there and top-up your insurance, fix your retirement plan, pick your debt and equity mutual fund schemes, and then wait to ride the wave a year or two down the line.