Five ideal destinations to safely park your money

Sensex and Nifty were sitting on a high wall but when the sub-prime crisis dragged the US economy into recession, they had a great fall! Usually nursery rhymes sound amusing to people. The catch words, however, here are the major indications of the economy and not Humpty and Dumpty. 

The poem, therefore, may not sound all that enchanting to investors, especially with high exposure to equities. In fact, with investors around the world reeling under the shadow of a financial crisis, SundayET brings you five ideal investment destinations where you can safely keep your money

TAX SAVING FDs & FMPs

As they say, old is gold. The safest place where you can bet your money in the current financial turmoil is the good old fixed deposit schemes (read tax-saving). The best part about tax-saving FDs is that not only they protect your earnings against inflation but also entitle you to tax rebate under section 80C. 

The deposits are close-ended, and you need to lock your funds for at least a period of five years to avail of the key benefits. Currently, tax-saving FDs offer more than 11% pa returns. 

“To enhance returns, you can also consider fixed deposits offered by high rated housing finance companies. The returns offered are a little higher then bank deposits. It is, however, advised to go for only AAA rated companies,” says Mukesh Gupta, director of Wealthcare Securities. Experts say that you should not invest in Post Office schemes such as monthly installment schemes, NSC and others as they still offer lower interest rates. 

FMPs are another option you can explore. For the uninitiated, FMPs score over bank deposits in terms of tax efficiency. “Currently one-year yields for FMPs stand close to 11% while liquid funds and short-term funds average one-year annualised yield stands close to 9%,” says Hitungshu Debnath, executive director, Angel Broking.

GOLD

The yellow metal can never lose its glitter. Wealth managers believe that inflation is likely to stay in the global system as a result of a global liquidity injection and therefore gold will be the flavour of the season. Also, gold is a good hedge against inflation and it has a weak or even negative correlation with equity markets. “Throughout September, 2008 when the Sensex was down, gold ETFs were up by almost 30-40% (one year annualised),” says Kumar. 

According to Gupta, “Returns from gold may or may not be great but it will act as an insurance if economic conditions further deteriorate.” Experts, however, say that if gold is bought purely for investment purpose, then gold ETF are a better option.

SOVEREIGN DEBT

Next on the list are government securities. These instruments are easily exchangeable for cash, and are available both in the primary and secondary market. 

They can be bought from banks and primary dealers. Wealth mangers strongly support debt-based financial instruments in the present scenario. 

“The best place to invest is sovereign debt. So G-Secs would be a good buy at present which, along with providing ‘risk free’ return, will benefit from the softening interest rate environment,” says Kumar.

MUTUAL FUNDS & SIPs

Ranked fourth in the list are the heroes that were topping the investments charts six months back — mutual funds and SIPs. Although markets are witnessing a fall since the beginning of the year, there is still a scope of investing here. “Investors with an investment horizon of more than three years should look at investing into equity mutual funds or direct equities. In fact, in the current scenario, SIP in equity mutual funds is a very good option,” says Debnath. 

Experts believe that for long-term investors, investing in large-cap stocks is also a safe idea, as it will result in a good diversification strategy. “The recommendation of large-cap stocks is made because when markets recover, it is the large cap stocks that will recover faster,” says Kumar.

RENTED PROPERTIES

Yes, you read it correctly. Rented properties can also make a good investment proposition in the present scenario. Rental yield is usually higher in commercial properties in comparison to residential properties. 

At present, rental yield on commercial properties is in the range of 8-10%. “Commercial lease agreements with respect to malls and office space range from three to nine years. Buying a space in a high-quality development and leasing it to a good brand is a wise investment decision,” says Gupta.

Does it make sense to invest in gold now?

Historical trend shows that crude and gold prices have a positive correlation. But in recent times, though crude prices have plunged to around $70 levels, which is almost half the price of its recent record high, gold prices are on an upswing and are making new peaks which shows that gold prices have moved against the historical trend and are showing negative correlation with crude. 

This is mainly because of the recent turbulence in global financial markets which has spurred the international gold price, given its safe haven status. The depreciating rupee against dollar, along with seasonal festive demand, have also contributed to the recent highs seen by gold prices in domestic market. 

But does it make sense to invest in gold when the metal or the ultimate monetary asset is in on an upswing? My answer will be why not? When you can grab more returns with same level of risk in the portfolio, why not invest in the gold. An example will help you understand this better.

How to go for gold

Tactical approach

When one is bearish on equity markets, but bullish on gold, one can increase allocation to gold and vice versa. This view, based on the market performance, is called tactical asset allocation.

It is, however, difficult for an ordinary investor or even professional investors to put this in practice as predicting markets is not an exact science. 

Strategic approach

The other approach is the strategic approach which is more scientific with less dependence on subjectivity and forecasting markets. This approach is about adding gold to the portfolio for diversification benefits. 

Theory says that diversification leads to lower risk at the same expected return level or higher expected returns at the same risk. But does it really work?

Why gold?

Chart A and B plot the returns expected at each level of risk taken. Consider chart A. We have two financial products we can buy, debt (bonds, PF, PPF, FDs are all examples of a debt product) and equity (direct stocks, equity funds and Ulips are examples of equity). 

At point 2, we are fully in zero risk bonds at an expected return of 6%. This means there is no risk of capital loss to my money, but my return is just 6% per annum. 

At point 1, all our money is in equity, so the risk (measured by standard deviation) is at 12%, but expected return is as high as 20%. At point 3, we are half in equity and half in debt that reduces risk to 6% and expected return to 13.47%. 

All points along the line 1-3-2 are points on the efficient frontier, which shows the maximum risk possible for a given level of risk. Any point below that is inefficient, because we can increase return by increasing equity for the same level of risk.

How to buy gold?

Now comes the interesting part. We can increase return for the same level of risk by introducing a third asset in this example (See chart B). This asset needs to have a negative or low correlation with debt and equity. This means that it moves in a more or less independent or opposite direction to these. 

We now have an asset allocation of 50% equity and 50% gold (remember this is for purely illustrative needs, actual asset allocation to gold needs to be no more than 10% in an average portfolio). At the same 6% risk level, the expected return is now 15.86%. 

The best way to invest in gold is through gold ETFs because it has tax efficiency, is available in small denominations at international price without premiums and has cost efficiency. It is also convenient for long term holding and most importantly, has liquidity.