The interest rate on fixed deposits has been coming down consistently. RBI repo rate, which is the lead indicator of yield on fixed deposits as well as other interest rates, has come down from 8% in 2014 to 6% in 2018- a reduction of 25%. Likewise, the gold prices have moved in a very  narrow range during this period.  The gold prices were around Rs 28,000/- per ten gram during 2013-2014 which is almost the same today i.e. Rs 28,012 per ten gram on 16^th Feb 2018, giving almost nil returns during this period. The real estate, though had given good returns during  2004 to 2015 period, has stagnated and is under time and price correction phase.

Due to all these traditional investment asset classes giving very low returns in the recent past, retail investors had started investing in equity via mutual funds. This is evident from the rise in the monthly inflow in mutual fund through SIP (Systematic Investment Plan). The SIP pipeline has been widening of late due to spectacular returns generated by the equity investments in past five years and especially in the last one year. The monthly investment in SIP has gone up year- on-year basis from Rs 4,095 crore in January 2017 to Rs 6,644 crore in January 2018, recording a 62.25% annual rise.  Major chunk of these SIP investments have been made in equity schemes including the balanced funds. Now with correction setting in the equity market, the investors are a worried lot. They are  undecided  whether to exit their investments made in  equity  through mutual funds or through equity shares. In this article, I wish to evaluate various investment avenues available  today and discuss which one is better for you.

Basis for selecting a particular investment avenue

The choice of an investment product suitable for you depends on various factors.  Age, risk profile, need for regular inflow, the time horizon for the investment and nature of the goal all impact your choice of a particular investment product. These factors should not be considered in isolation but have to be taken  in conjunction with each other. For example, a young person can be advised to invest in equity products taking into account his age but if the time horizon for the investment is just one  to two year, we can’t advise him to invest in equity products.  Likewise,  we can’t  advise a retired person to invest in equity products as , his ability to take risk has come done substantially with his retirement. But if his sole goal of making investments is  not for  sustenance but for the purpose of wealth creation to be passed on to the next generation, he should be advised to invest in the equity products only. 

Fixed deposits and other fixed interest products

Instruments like fixed deposits of banks, RBI 7.75% saving bonds, senior citizen saving schemes (SCSS) or annuity under Pradhan Mantri Vaya Vandana Yojana are suitable for the people who have retired and therefore can’t risk their capital and need monthly inflow for day to day expenses.  All the fixed interest products may not be suitable for senior citizens like high interest fixed deposits of corporates as they carry higher risk of default as compared to other products mentioned above. The rate of interest offered on the fixed rate products depends on the interest rate cycle. Based on the actions of the State Bank of India of raising the rate of interest on fixed deposits and hiking of  Marginal Cost of Funds based Lending (MCLR) rate by HDFC Bank and Axis Bank very recently, it seems that the interest rate cycle has just bottomed out. So, the rate of interest will not go down substantially from here onwards and may go up in the near future.

While choosing the fixed rate products for your investment, it is necessary for you to take into account the impact of income tax on such  instruments. So these products give better post tax yield to senior citizens who do not have any major source of income other than  interest or annuity. Meanwhile, fixed interest instruments may not  be able to help you in beating inflation in case you are a tax payer in higher 30% slab rate. Let us understand this with an example. Suppose you put your money in a fixed deposit @ 7% rate of interest on which your post tax return comes to 4.90% (assuming the slab rate of 30%). This post tax yield of 4.90% is lower than the average inflation of 5-6%.

Monthly income plans of Mutual Funds

For retired people who can’t risk their capital can invest in monthly income plans of mutual funds. These schemes invest part of the money, anything between 10% to 25% in equity so as to provide better returns. The debt schemes of the mutual funds where the equity component does not exceed 10% are classified as conservative and those with equity component upto 25% are classified as aggressive. Though these schemes have nomenclature of monthly income but factually do not give regular fixed monthly income but may declare dividends on monthly basis if the scheme opted is dividends scheme. Otherwise, under the other option of growth, the value of the investments grows to that extent. You can opt to withdraw a certain sum of money at fixed interval from such investments by opting for Systematic withdrawal plan (SWP). 

The historical returns of these schemes are given here under which is a proof that these have given better returns than the fixed benefits.  Moreover, due to the benefit of indexation available on these investments after three year  holding period, the effective tax rate will be lower than the stated rate of 20% on such investments.

Gold

Our parents and grandparents used to buy gold or gold jewellery as and when they would have surplus money. Gold has historically been able to give you protection against inflation only. Therefore,investment in gold is never advisable. However, we in India need gold at all the conceivable social occasions, be it marriage of son or daughter or birth of a child in the family.  So for accumulating gold for  social needs, I would advise you to  buy a small quantity of gold at some interval based on the surplus available and requirement of gold anticipated in the future. I would advise you to buy gold in the form of either physical gold bars or through gold ETF from stock exchanges. The physical gold bought by you may need locker for safe keeping whereas the investments made in gold through gold ETF is subject to fund management charges of between 0.75% to 1% every year. I would never advise you to buy gold in the form of jewellery due to high cost of labour charges embedded into it. It is not necessary that the jewellery bought by you today may still remain in fashion at the time of marriage of your son or daughter and in all probability you may have to get the jewellery redone and thus lose the labour charges of around 10% to 15%. The historical average returns on physical gold since 1981 are just 9.06%, which is just little higher than the average inflation during the same period of 7%. So investment in gold is advised to the extent of your social needs.

Equity shares and equity mutual funds

With equity indices coming down due to various reasons like imposition of long term capital gains (LTCG) tax in the budget coupled with the huge Punjab National Bank(PNB) scam, people are worried about making fresh investments in equity. The Sensex has given an average annualised return of around 16.79% since 1981. The Sensex does not take into account the quantum of dividends declared by the Sensex companies during the same period. The average dividend yield of these companies has been around 1.50% during the period of last 20 years, which takes the average equity return to 18.39%.

The large cap fund schemes as a category has given an annualised return of 8.66% in the last 10 years against its benchmark of 7.19% during the same period which increases your returns by another 1.47% to the Sensex return (with dividends yield) of 18.39% to 19.86%. The returns are taken as an average of the category. However, if you chose and monitor better performing schemes the chances of your return on equity investments in longer term going above 20% are quite hight..

Please note that these returns are not generated year after year but are the average return if one has remained invested over a long period of more than 10 years. Longer the investment period, lower is the volatility in the returns generated from your equity investments.. 

Please invest in equity, if you have longer time horizon of at least seven years. For example, the Sensex was at its peak of 21,206 on 10^th January 2008 which nosedived to  8,325 on 6^th March 2009 and regained it again only on 1^st November 2013. So, anyone who had invested lump sum on 10^th January, 2008 had to wait for almost five years to recover his capital. So, there are a few lessons from the crash of 2008. Never invest lump sum in equity and never enter into the equity investments unless you have an investment horizon of more than seven years.

In my opinion, investments in equity are the only way to build your wealth., Investing in equity shares directly is a full time job and requires expertise of special kind. You may be able to enter in a specific share but do not know the right time to  exit as no company remains a darling of the market for all the time. So instead of investing in equity directly, I recommend to make  equity investments through mutual funds schemes. It is the full time job of fund manager to study the companies, various industries and economic situation prevalent in the country and the world. The fund managers are in touch with the company’s management and  are generally aware about the happenings around the company and industry and are in a better position to take buy or sell decision quickly. They are also equipped with tools and human resources to carry out the research required for equity investing. 

So, every correction in the market is an opportunity to buy more of the units of your favourite scheme.. The market may go up or go down in the short run but it is going to go up in long run.So stay invested for longer term to reap the benefits of higher returns. Have patience. Never stop your Systematic Investment Plan (SIP) during the bear phase and rather enhance it if you can.

Insurance products including Unit Linked Insurance Plans (ULIP)

One basic principle of investment is to never  mix your insurance and investments needs. For your protection needs, buy term plan and preferably online term plan and for investment needs invest in the pure investment products suitable to you based on your tenure, age and risk profile etc. After budget proposal of imposing 10%  long term capital gains tax on equity investments, life insurance advisors have started marketing the ULIP products as tax free investment. However, if you take into account various costs associated with ULIP like mortality charges, premium allocation charges, policy charges, fund charges etc., the tax free returns from ULIP are not going to match the returns which an average mutual fund scheme will help you to generate. Moreover, the equity mutual fund schemes give you the flexibility of the amount and fund house for making investments which is not available in case of  ULIP products.

Real Estate

Historically gold and real estate have been the only two investment avenues available to the people in India.As  old habits die hard, people still consider investments in real estate as a good bet.. The  most important factor responsiblefor investment in real estate is the lack of knowledge about alternative investment avenues available in financial sphere. Second reason is the “Large Value Bias”. If one says that his investment of one hundred in share has grown to two hundred rupees in five years and when the other says my investments of one crore in a flat has grown to two crore in five years, the investment made by the second person looks more attractive due to this  bias whereas the rate of return generated by both the investments is same i.e. 100%. In my opinion, investment in real estate does not make a good investment except in house or office for your own use. The first reason is that investments in real estate requires committing large funds where as you can start investing in equity with Rs 5,000/- as lumpsum and a monthly SIP of as low as Rs 500/-. The investment in real estate requires you to incur some costs for maintenance in the form of maintenance charges. Moreover the investments in real estate is an illiquid investment and you can’t dispose of the same as and when you want. There are instances where people have waited for two to three years to dispose of their flats  which is not the case in case of  financial investments.  Likewise, you can’t partly liquidate your investments in real estate unlike your financial investments in mutual funds. Though there are no historical data on return on investments in real estate,  but  historically the real estate as an asset class have not given return of more than 10% on an annualised basis.

So from the above discussion it becomes evident that investments in equity gets you higher returns as compared to other asset classes but let me reiterate that no single product is suitable for all. The choice of the investment product will depend on various factors as discussed above. Evaluate your situation and take the call but do not get frightened by the correction in the equity market.

The author is a CA, CS, CFPCM