The adage to be followed before investing in any financial instrument or other asset class is simple - knowledge is power. Empower yourself by first understanding the implications of new developments, policy announcements and market dynamics.
Putting your hard-earned money into any investment option that promises returns that seem too good to be true is a sure fire way of saying goodbye to it.
Where to invest
According to Sanjay Chudgar, Financial Planner, Aretic Group of Companies, 2014 seems to be a good year from an investment point of view. "But invest only in secured, guaranteed return and good instruments like FMP’s, LIC bonds, PPF planning, health insurance plans, pension retirement funds, long term insurance policies, ‘AAA’ rated company fixed deposits, SIP mutual funds of minimum 5 years. These are genuine investment avenues available. Go for long term investments as they are more secured and safe," he advises.
The slow economy offers an advantage to real estate investors, according to Arvind Jain, Managing Director, Pride Group. One symptom of a recessionary economy is that people think twice and thrice before making any new high-value financial commitments. They will pursue their home ownership dreams when they perceive that stability has been restored in the economy and therefore in their lives. Until then, they would often prefer to live in rented homes. This is also known as the 'wait-and-watch' mind-set, which results in reduced demand for homes during the period of insecurity.
Because property prices are a function of demand, they tend to reduce in times of economic uncertainty because that is the only way to keep sales going. This is the ideal time for property investors to pick up properties at lower costs and rent them out to purchase-averse families. When the economy improves, so will the appetite for home ownership. A rise in property prices will follow naturally, resulting in a tidy profit when the property is put up for sale, Jain opines.
It is not possible to ascertain exactly when property prices will reach their lowest point and start picking up again after that. However, one good indicator is the job scenario. When the industries that drive the economy start stepping up on hiring, the economy improves. Going by news reports, 2014 is going to be a year of massive hiring sprees for India's banking and IT industries. This will mark the onset of economic revival and therefore a pick up in demand for properties, which will signal a hardening of property rates.
"While the reduced sentiments prevail, developers and investors in India's larger cities are still open to negotiation. Moreover, many of the new projects that were launched in the low economic period featured significantly reduced price tags. Is this the fabled 'market bottom' that every property investor considers the magical entry point? Impossible to say... but whenever it does come, it will not last forever," Jain points out.
Sanjay Chudgar warns individual investors to be careful in 2014. Don’t invest in 'Ponzi' schemes offering unrealistic returns, which are promoted and marketed by unknown people and less reliable companies. Don't get lured by unprofessional agents and do not invest in any schemes under any obligations, he cautions.
As Raamdeo Agrawal, Joint Managing Director, Motilal Oswal Financial Services Limited points out, the stock market is full of people who know the price of everything and the value of nothing. Relying on hopes and prayer is not the answer, in-depth and systematically done research is far more important (see box), he advises.
Identifying emerging values creators
One should scientifically seek out value creators. These are rare, and hence, the opportunity to catch them early will be even more rare and risky.
To counter this, investors may use a checklist against which to evaluate every emerging value creator or company, which reports 15% RoE for the first time.It comprises key industry-level and company-specific factors, which are crucial for a company to successfully complete the journey from emergence to endurance. Remember, more the positive ticks, greater the degree of confirmation.
1. Competitive landscape and bargaining power: Is the industry’s competitive landscape favourable? Do players enjoy superior bargaining power / terms of trade with customers and/or suppliers?
2. Size of opportunity and profit pool: Does the industry enjoy a large profit pool which can be effectively tapped into by a company with a unique value proposition or strategy?
3. Value migration (e.g. from fixed line to wireless telephony): Is the industry showing trends of value migration? Or does it offer opportunity for the same in future?
4. Stability of industry: Is the industry fairly stable i.e. less prone to destabilizing factors like business cyclicity, high production innovation, and regulatory controls?
5. New industry or strategic opportunity: Is it a new industry or strategic opportunity with huge potential? e.g. e-commerce, home-delivered pizzas
Corporate-parent/management team: Does the company have a solid corporate-parent and management team? (Indicators are group track record and reputation, quality of communication in Annual Reports, result updates, and other media releases, payout policy, etc)
Unique value proposition or distinct strategy: Does the company have a unique value proposition or strategy to overcome competitive forces?
Nature of business advantage: Does the company enjoy consumer advantage or production advantage? How strong is the advantage?
Market leadership or pioneering: Is the company being analysed a market leader or a pioneer?
Raamdeo Agrawal, Joint Managing Director, Motilal Oswal Financial Services Limited