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2003: What will be best investment class

Gaurav Dua | January 06, 2003

The Bombay Stock Exchange Which assets will give you the best returns in 2003? Historically, investments in equity have tended to outperform all other avenues over the long term.

Over the last two decades, the Indian equity markets have provided an average return of over 16 per cent per annum as compared to around 10 per cent for bank term deposits and about 6 per cent for gold (based on domestic prices).

Real estate has been another popular investment option. It was seen as a safe haven that has the potential to provide handsome capital appreciation plus annuity income in form of rentals.

But the scenario changed dramatically after the crash in 1994-95. Since then, real estate prices have been on a downward spiral across the country.

In the past few years, mutual funds have also emerged as a serious investment opportunity.

However, given the gross underperformance of the public sector funds and the disastrous fall in the asset values of certain categories of schemes (namely, tech funds), investors are still wary about handing over their cash to fund managers.

The fact that even in the last five years equity funds have not managed to match the returns provided by fixed income instruments cannot have helped improve the faith of the investing public in mutual funds.

But the picture is dramatically different if one looks at the performance of various asset classes in the last one year alone.

Thanks to the economic recession in many developed countries, gold regained its lustre and clearly outperformed other investment avenues with an appreciation of over 20 per cent in 2002.

What's more, commodity analysts think gold could continue to sparkle due to the ongoing tensions between US and Iraq. But does that make gold a good investment for ordinary investors?

The pros warn that it is better to err on the side of caution.

Gold prices had vaulted during the early-1990s Gulf war too, but within six months they settled down to pre-war levels. So, investors may be better off utilising any upward spike to book profits - if they already hold gold.

Gold is not the only beneficiary of the recession in the world economy. The weakening dollar has resulted in investors rushing for the Euro.

Consequently, the currency has appreciated by about 18 per cent against the rupee last year. "Unless the US economy show some signs of revival, the Euro will continue its upward movement this year also," predicts Rohan Lasrado, assistant vice-president - forex, HDFC Bank.

Mutual funds also have something to cheer about last year's performance. The soft interest rate regime and the subsequent rally in the debt market was a godsend for debt funds.

This year, however, could be different. From current levels, most experts discount the possibility of a further fall in yields.

The yield on 10-year paper has fallen by 130 basis points in the current fiscal on top of the 300 basis points fall in 2001-02. So, the scope of a further fall is limited. Which means bond prices may not have much room to rise.

Says K. Ramanathan, fund manager, Birla Sun Life: "Unless administered (interest) rates are brought down in (or before) the next budget, there is not much scope for interest rates to witness a substantial fall from current levels."

In 2002, equity funds have also registered a robust performance on the back of the upsurge in mid-cap stocks, the divestment story, and improved performance in sectors like steel and textiles.

This broad-based rally enabled equity funds to comfortably outperform popular indices like the Sensex and the Nifty.

This year too may be good for equity funds. Analysts expect the equity markets to stage a significant comeback after a hiatus of nearly three years.

Driven by improving fundamentals in the form of rising sales and profitability in many sectors, the stock markets have already shown some signs of revival in the past two months.

The BSE Sensex has risen from a low of 2841 in October to 3377 on December 31, 2002. This trend is expected to continue.

Read together with the possible slowdown in the debt market rally, 2003 bears all the hallmarks of an equity revival. As investors realise that debt can no longer provide double-digit returns, they will start pumping money back into equity.

Kelkar may do his bit, too. If some of his key proposals are given effect to in the budget - especially the abolition of long-term capital gains tax and taxation of dividends in the hands of investors -- market sentiment will soar.

Taking all factors into account, investment in equities is expected to outperform other investment opportunities this year.

So, it might be advisable to increase one's exposure to pure equity funds or even balanced funds. More so, as returns on other popular options like debt and bank deposits don't look too encouraging.

Even real estate is expected to provide decent returns only in certain pockets, with the overall property market set to remain stable or show only marginal improvements.

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