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Posted by: Uma Shashikant and Deepa Vasudevan on Thu, Jan 8th, 2015

The Best Investment in 2015

 

Asset class returns 2014

 

If one needed lessons on diversification and asset allocation, 2014 provided them very nicely. At the beginning of the year, there was tentativeness about equity.  Analysts were not sure how the elections were headed; corporate earning numbers were falling behind; and FII flows were not rushing in. From a Sensex level of 20,000 in January 2014, a target of 24,000 was the consensus level to end the year with, as most managers were “cautiously optimistic.”  Chidambaram was reigning in the fiscal deficit, but many saw it as strong-arm tactics of expense management. The bond markets did not buy much of the fiscal discipline story and since RBI was busy with the current account, expectations for a rate cut were muted. No one wanted to speculate about the USD-INR after the roller coaster ride in 2013.  People were buying into banking and infra stocks as they had just begun to do well. Buyers of gold and silver were telling themselves that the prices were now good enough to buy at the bottom, and no one spoke too much about oil.

 

The end of the year was a completely different story. The equity market ran up after the general elections, primarily based on the hope for reforms and end of “policy paralysis”. As it always happens in India, the mid caps ran ahead of the large caps, as economic revival reduces business risks for many of them.  We wrote about the equity indices here. USD-INR seemed to settle around Rs.60/$ with remarkable stability for most of the year, largely due to healthy FII flows. See our blog on FII flows here.

 

The surprise stories were in oil and inflation.  Though analysts were bullish about the shale gas discoveries, no one really saw the crash in oil prices coming.  The steep fall of 43% left oil-exporting countries like Russia gasping for breath, while helping importing countries like India.  Inflation numbers fell from a drop in food and fuel prices, and the bond yields reflected this optimism, falling below the 8% mark. FII inflows in bond markets were higher than in equity markets, for the first time, as low inflation enhanced the possibility of a rate cut by RBI. This story should play into 2015.

 

The weakness in commodity markets could be attributed primarily to the slower than expected recovery in most developed economies. US was the notable exception, posting a higher than expected growth rate of 5% in the third quarter of 2014, which meant that the US dollar appreciated against most currencies in the world. This led to a shift in preference of central bankers from gold to the US Dollar, triggering a fall in gold prices.  As we begin 2015, investors are asking about which is the best investment at this time.  The answer is quite staid and simple.  If we did not see what was coming in 2014, we are not likely to have a  crystal ball vision for 2015. A diversified portfolio that invested in all the above assets  would have earned a 14% return.  That is much better than the benchmark levels for inflation and money markets, which represents what money that did not take on any risks may have earned. That is reason to rejoice.  It is not as high as the 40% some equity portfolios made, but not as bad as the 18% lost in silver either. And a diversified portfolio would have participated in both equity and debt, making money off the falling yields too. 

 

When it comes to investing, there are two choices. One is to remain romantic and hope to get lucky; the other is to stay pragmatic and diversify.  We have to make that choice and the New Year is a good place to begin.

amit marathe on Fri, Jan 16th, 2015 8:51:52 am

Dear Uma, I feel the key in any investment decision to look at assets where there is value to be unlocked.Thus diversification may not be the answer always.It is equally important to study possible expectations for the next 2 years and then invest in an asset class.The problem with investing is that people generally look at past returns and then invest.The key to figure out whether an asset class is fairly valued or has room for an upside and then commit for atleast a 2 year plus period.A 20% annualize return is possible without taking undue risks if you allocate in the right proportion rather than just plain diversification

MANOJ KUMAR SHARMA on Thu, Jan 15th, 2015 10:38:21 pm

I THINK DIVERSIFIED HAVE AVERAGING IN MONEY WITH SECURITY OF PRINCIPAL BUT IF IT WILL DIVERSIFIED ONLY IN EQUITY IT WILL GUVE BETTER RESULTS THAN THIS

Suresh Chauhan on Tue, Jan 13th, 2015 11:06:16 pm

Yes Ma'am, you are right in saying that a diversified portfolio works in both equity and debt or Asset allocation is important to get good return.

Atul Kamdar on Mon, Jan 12th, 2015 10:36:50 am

Very well summarised 2014 indeed. The choice for 2015 is obviously to remain pragmatic and diversify.

Praveen Reddy on Mon, Jan 12th, 2015 8:01:43 am

Ma'm I have been reading your articles in ET-Wealth . I am glad that someone is out there offering prudent advice on a regular basis.

bhikhu p patel on Sun, Jan 11th, 2015 10:43:34 pm

very nice article

kanishka chitale on Sun, Jan 11th, 2015 9:15:41 am

What is the percentage diversification in the asset classes mentioned above. Should one invest equal percentage in all asset classes?

girish dholakia on Sun, Jan 11th, 2015 8:41:50 am

Very Good observation

G KUTESWARA RAO on Sun, Jan 11th, 2015 8:16:54 am

very knowledgebale resources

K V S Chauhan on Sat, Jan 10th, 2015 4:10:35 pm

Good analysis. Thank you. Will keep in mind the observations and translate them in asset management.

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