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Should ordinary investors look at cryptocurrencies now?

Author: Col. Sanjeev Govila(Retd)/Friday, October 13, 2017/Categories: Ask the Finapolis

Should ordinary investors look at cryptocurrencies now?

Cryptocurrencies, especially Bitcoins, have been galloping fast since January. What is the future of this asset class? Also, with alternatives to Bitcoin such as Ethereum emerging, are we seeing newer entry points for investors (For instance, while a Bitcoin is priced closer to $5000, an Ethereum coin comes close to $280)? How would you assess the future of this asset class given the recent disruption in China and Russia? Should ordinary investors look at cryptocurrencies now?

—Rituraj Pati, Mumbai

Bitcoin is a digital currency, created using complex algorithms and held electronically. No one apparently controls it and the general understanding about their creation, storage and logic behind their price movement is scanty, to say the least.

Bitcoins aren’t printed, like dollars or Euros. These coins can be divided into smaller parts - the smallest divisible amount is one hundred millionth of a Bitcoin. There are lots of uncertainties associated with investing in Bitcoins such as rare (though increasing) acceptance worldwide, possible technical failures like Data Crash / loss, unjustified valuations and fluctuations, and non-availability of physical form.

In the last 6-8 months, the trend of investing in Cryptocurrencies like bitcoins has been increasing. But the way I see it today, it is not a reliable asset for investments. There is no security supporting Bitcoins in case of any default, whenever and wherever it takes place. The price movement of these Cryptocurrencies seems to be happening due to speculations and of course, demand-supply gap. Considering high volatility, less acceptability and uncertainty of government regulations as and when they come, we recommend you not to go for Crypto currencies. As on today, the traditional asset classes are what we would recommend you to go ahead with.

I just started my professional career at the age of 22. I want to start investing certain amount of my salary, where should I invest? Also, I want to study further and transform into a Financial Markets Professional? What all Courses are available in India for a graduate? Kindly advise.

— Karan Ashar, Mumbai

Considering your young age of 22 years, we assume that you do not have any liability or have anyone financially dependent on you. At first, you must maintain a contingency fund for emergency requirements; for you, the best avenue for long term investment is through monthly SIPs in Mutual Funds in a carefully crafted diversified portfolio. Considering your age, your portfolio should be aggressive with adequate equity for good long term performance but the quantum of equity percentage should be ascertained through a proper risk profiling.

There are many short term courses provided by national stock exchanges of India, namely NSE and BSE and also by the indian financial markets regulator, SEBI. You can check their websites for complete information about the courses offered and also to read up on what would interest you the most. These courses will not only enhance your knowledge but also give you a leg-up in your resume. One important point you should keep in mind while doing such courses is you may start with Beginners’ Module and then subsequently shift over to Dealers’ Modules as you gain knowledge and confidence.

I have purchased two adjacent apartments in a cooperative housing society in Kalyan. Would I be able to get a single insurance cover for both the properties? I have also taken a home loan to finance my purchase, therefore I would prefer to insure the loans with a single policy. Kindly advise.

- Surya Bhilare, Kalyan

Insurable interest is the fundamental concept of insurance agreement between the insured and the insurance company. As mentioned, you own both the apartments and thus, you have insurable interest on those properties.  Hence, you can have single insurance cover for the two adjacent apartments in a cooperative housing society. You need to submit a number of documents for the same to the insurance company for taking the insurance cover. The company will verify the documents and there’s a likleihood that they may carry out a physical verification too. Please note that the ownership of the two apartments must be same (and in the same order of holding, if jointly held) while applying for the insurance cover.

How should I calculate market risk for my equity investments? I have invested in 150 shares of Sun Pharma and I would like to know what the future performance of the company will be?

- Dhrishti Sawant, Pune

Market risk of equity investments is all about the movement of your portfolio with respect to the market moves. Moves of the market is dependent upon many factors of economic, political, and social issues. You need to work out the Beta of the stocks held by you and their co-relation with the market index. The lower the correlation of your stocks with the market, the lesser will be their market risk though individual stock related risks will always remain in any stock investments.

Large pharma companies like Sun Pharma had remained under pressure in the past three years due to regulatory uncertainities, burden of sustaining historical growth rates on large bases and a stronger rupee, amongst many factors. Having been beaten down by 15-40% over the past two years, these companies are once again being fancied now due to the favourable news coming from USFDA filings and some move of the investors to these defensive stocks. Sun Pharma is a prime candidate for investment in such leanings towards pharma stocks. Recently, Credit Suisse upgraded the rating of India's largest pharma company, Sun Pharma, to outperform from neutral with a target price of Rs 595. It is a good pharma stock to hold in the portfolio for the long term.

Given the current volatility in the capital markets, what are the best investment avenues for the average investor? Kindly also advise as to how these investments can be gradually channelised into a sizeable retirement kitty?

— Harshini, Mumbai

There are many investment avenues available to an investor and they can all be used in their own ways to build up a retirement kitty. Since the time horizons are typically long in saving for retirement, an equity based portfolio in which systematic investments is done along with some bulk as and when available would be a near-ideal option. However, such a portfolio assumes some comfort level with equity as an investing class, which may or may not be there. In general, to an average investor the following investment avenues are availble:-

Avenues for investments

Expected  returns

Equity Mutual Funds

12% - 18%

Public Provident Fund

7 - 8%

Balanced Funds (debt and/or  equity balanced fund )

8%  - 12%



As far as other avenues like bank FDs, government and corporate bonds, and post office avenues etc are concerned, taxation is a big concern there and could substantially erode portfolio values over such a long term. Real estate investment demands large investments and has operational complications. Also, current state of real estate market does not call for any fresh investments now or in near future. The future of Gold as an investment class also does not inspire confidence.

In a nutshell, an equity based portfolio comes out to be the best bet for a long term wealth creation for retirement. Volatility of stock markets is their inherent characteristics and one gets good long term tax-efficient returns in them due to this volatile characteristics. Take exposure to stock markets preferably through good quality diversified mutual funds rather than direct stocks, unless you have great stock picking skills and have good investing patience.

I plan to purchase a 1BHK apartment in the suburbs of Mumbai (Virar, etc) within one-and- a-half years? How should I plan my investments to achieve this goal? What should be the minimum investment per month and what would be the tenure? Would I at least be able to earn a portion of my property price from my investments? Kindly advise if this is a realistic plan?

—Suhas Bane, Mumbai

The current average price for a 1BHK standard property is around Rs 25 – Rs 30 lakhs in suburbs of Mumbai like Virar. You wish to buy the flat within 1.5  years. We assume that you do not have any bulk amount presently for purchasing it.

It may be very difficult to save for such a large amount completely within a period of 18 months – you would require a monthly saving of about Rs 1.5 Lakhs for it. Here we assume a net rate of return of about 7.5% per month, primarily in safe investment avenues like accrual debt funds. Equity investments should be considered only when the investment horizon is more than 3 years or so.

A realistic accumulation of Rs 10 Lakhs in 18 months would require Rs 52,000 approximately while 5 lakhs would require Rs 26,000 per month. The rest would necessarily be either from your other sources like relatives and friend or a home loan or a combination of the same.  If you take a home loan, for the balance amount of Rs 20 Lakhs, you would need to pay an EMI of Rs 41,000 for a 5 year loan, Rs 25,000 for a 10 year loan and about 20,000 per month for a 15 year loan, considering an interest rate of 8.5% per annum. We advise you to keep the loan tenure as low as possible to keep the interest component low. Eg, in a 15 year loan period, you pay an interest of about 15.5 Lakhs on a 20 Lakh loan while in a 5 year loan period, the same goes down to just 4.6 Lakhs.

There is no minimum investment amount per month. It totally depends on your individual earnings, expenditure and surplus available for investment.

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Col. Sanjeev Govila(Retd)
Col. Sanjeev Govila(Retd)

Col. Sanjeev Govila(Retd)

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