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Personal finance outlook for 2019: Here's what experts have to say

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Personal finance outlook for 2019: Here's what experts have to say

Personal finance outlook for 2019: Here's what experts have to say
Another year draws to a close and it has been quite a roller coaster for investors. While 2018 may not be a blockbuster year in terms of actual market returns, if you have got your personal finance plan in order, you wouldn't have had too much to worry about this year.
CNBC-TV18 looks back at the year gone by and more importantly talk about the trends that are likely to shape wealth creation in 2019.
Surabhi Upadhyay is in conversation with Abhijit Bhave, CEO, Karvy Private Wealth;  Samir Jasuja, co-founder, Prop Equity and Kunal Shah, head of commodities and currency research, Nirmal Bang Commodities, to get real estate and commodity outlook for 2019.
Watch the video here:
Edited Excerpts:
It has been quite a year of ups and downs and topsy-turvy, changes in taxation, long term capital gains (LTCG) tax etc... When you look back at 2018 and you think about wealth management and wealth creation, what is the first thing that comes to mind?
Bhave: When I look back at 2018, two words come to my mind; less and lesson. It was a year of fewer returns and it was a year of many lessons. A lot of things were happening globally but if you look at equity market, the index would typically only end up going up 6-7 percent and the returns would be ranging from that level to negative returns in equity.
If you look at the debt markets, we had a lot of turmoil with interest rates wavering; going up and down. So it was a rollercoaster and to add to that the entire IL&FS fiasco. Therefore, even in debt funds, people saw returns which were from 1-4 percent. So a lot of lessons for investors who were looking at mega returns in 2018.
One major lesson is that asset allocation matters but so also sub-asset allocation. When we started the year, I remember we were telling our investors at Karvy that within equity at least 50 percent should be largecap and then there was grid coming in and a lot of people thought they will get a return of 30-40-50 percent and went into midcap and smallcap. They got 30-40-50 but minus 30-40-50 percent. We had also said that in debt, do not go for duration or credit plays just to get 1-2 percent extra. Focus on short-term debt and focus on fixed maturity plans. If that was a core of a portfolio; largecap and fixed maturity plans or short-term debt, people would have better off. These are two lessons on equity and debt.
You have also undertaken the India Wealth Study – that’s an annual report that Karvy brings out and I was looking at some of the findings, even though it was for FY 18 but a lot of it extrapolated for the calendar year as well. So the good takeaway is that financialisation of savings continues to happen. There is a lot of money moving now in equities, in mutual funds and actually fixed deposits have declined in the year that closed out. So throw in some of the highlights of the study.
Bhave: If you look at 75-100 years back, people were investing only in gold and real estate and in economics we have called ‘J’ curve where it gradually goes up. From 1991 people have been putting more money in financial assets and more so in the last four-five years. Therefore, our finding is that it has been a very good year, overall wealth has gone up by 14 percent but financial assets have gone up by as much as 17 percent. If you look at the overall financial assets, the top five are direct equity, fixed deposits, insurance, savings accounts and cash.
The growth rate has gone down in fixed deposits (FD) because the growth rate has gone down. It was number one last year and this year equity is number one and interestingly insurance has always in the top 3. We have been doing this study for the last nine years and even today we are at such a low penetration level that we are less than 4 percent.
So insurance growth would keep on happening but if you look at going beyond that. In Mutual funds, by the way, 60 percent is now equity funds and more than half the industry is individual investors. Therefore, we believe that the trend is going to keep on growing. This year, if the numbers are right, around Rs 85,000 crore were taken out by foreign institutional investors (FIIs) from debt and equity put together, but a billion dollar came out through systematic investment plans (SIPs) every month.
If this year this kind of money has moved out and retail investors has not put in the money, the stock market would have crashed and they have not and that is a big takeaway for the year. In the next few years when the FIIs and retail investors come back in, the market will go at different levels.
What is your advice when it comes to equity investments for the year that we are entering?
Bhave: If you look at 2019 and beyond, first of all, nobody should invest in equity for one year. So we are very positive on equity as an asset class. In fact, we are saying over the next seven years the Sensex would treble to 1 lakh. Informally, people talk of 1E and that ‘E’ is election; this is an election year and for the last two decades elections have come and gone, markets have moved in a direction that they have moved. The two ‘E’ we are talking about are economy and earnings. We believe that earnings growth, which has not been happening for a long time, would be in the range of 18-20 percent over the next seven years and add to that we believe we will have a PE rating and that would typically be in the range of 20-21 that could take the market up.
The CAGR is less than 16 percent for a trebling of the market and for people who have short memories. From 2003 to 2007 the stock market has gone up six times. So, fundamentally we believe that market will move. However, coming back to your question - if you look at 2019, we are saying you should be equity overweight so if a conservative investor is normally 50 percent equity, he should be 60 percent. So let’s talk of only mutual funds; so within that 50 percent should be largecap mutual funds because you have better corporate governance, you have a better surety of earnings and you will not have those downswings coming in. 20 percent should be multicap, 20 percent can be midcap and 10 percent sectoral. Our preferred sector is banking and financial services.
Since largecap is a play you are interested in. I think multicap and midcap is a category that people really want to dabble in and want to know if great returns will come in. So give us some names?
Bhave: If you look at largecap, we prefer three funds; ICICI Prudential Bluechip Fund, HSBC Large Cap Equity Fund and SBI Blue Chip Fund. However, again I am saying that look at the long-term which is at least 3-5 years. Do not look at one year investment. You buy and you hold.
Coming to the more interesting bit of it – the multicap, midcap, smallcap category where you are saying not more than 20 percent of the portfolio should go but how are you choosing the funds. What are your preferred funds?
Bhave: We regularly keep on meeting the fund managers and finally it is the man and the process behind the investment. Therefore, our view is that if you look at the multicap the top three funds that we would recommend today are Kotak Standard Multi-cap Fund, Mirae Asset India Equity Fund and UTI Equity Fund.
We have discussed equity in great detail, the importance of fixed income cannot be emphasised enough. Here is where it has been a roller coaster ride, people are confused because of the IL&FS event. One does not know even the accrual fund might start showing losses, there were MFs selling certain types of paper in between so what is the lesson there and in fixed income funds what would you recommend for 2019?
Bhave: The clear lesson is to be careful. If a person goes to debt because he wants to take less risk and get a reasonable return and if you want to get 1-2 percent extra, I think this is not the year to take that risk.
If one were to look at where to put money in 2019, starting with mutual funds we are clearly saying not a year to look at credit risk or the duration risk, stay away from them. Look at short-term debt funds.
Short terms funds would be funds which are investing in paper which would be of 3-6 months maturity and don’t go beyond that?
Bhave: Yes. So, we have Reliance Short-term Fund, Franklin India short-term Income Plan and Baroda Pioneer Short-term Bond Fund as our top picks. We are also looking at Ultra Short-Term funds for parking money and there one could look at SBI Ultra short-term fund and Franklin Templeton Ultra Short-term Fund. This is for mutual funds.
We are also saying that look at fixed maturity plans for the tax angle. You have locked-in return and you don’t have the ups and downs of the listed debt funds.
What are the kind of underlying securities that typically a fixed maturity plan would invest in?
Bhave: You should go for AAA or a AA fixed maturity plan. This is a very interesting question because till last year people were assuming NBFCs as same risk profile as a bank. So, one should go to a financial advisor and see where they can get best rated papers.
So you stay invested for three-years and when you come out it becomes tax efficient as well. Now, beyond the MF universe, traditionally India has always invested in fixed deposits or postal savings scheme or national saving certificates – do this also appear on your radar? It seems that the Sukanya Samriddhi Scheme launched by the government a couple of years ago is drawing a lot of money?
Bhave: The Beti Bachao Beti Padhao campaign has got eyeballs but more importantly people are looking at very long-term investments for a particular goal which is pure financial planning. So we have actually seen a 50 percent growth of money moving into Sukanya Samriddhi Scheme and for somebody who has a girl child it is a good investment because you have the government guarantee, you have fixed return, which is a reasonably high return.
The other thing one should not miss out though it is not a pure debt the new pension scheme (NPS) also has a debt-equity combination and you get a straight tax break.
(Note: now the entire 60 percent of the corpus that you will get to withdraw upon retirement becomes tax-free, while 40 percent has to go into the compulsory annuity)
The other angle is once you finish Section 80C there is nothing left for you. For NPS, you get Rs 50,000 more and if you are in top tax bracket you are getting the break of 33 percent. So return on investment day one is 33 percent. Plus you get 8-10-12 percent. So it is a fantastic investment. People who are self-employed should definitely look at PPF because that gives you a good return and gives you tax saving also.
The big question to you if we are talking real estate then if you want to encapsulate 2018 how would you look back at the year gone by?
Jasuja: 2018 has not been really a very good year for residential real estate. There has been hardly any appreciation, we were saddled with over supply and also with execution concerns, especially from category B developers. Although category A developers did pretty well, for the residential asset class it has been a year that we would like to forget. Although there was some execution that was done by a category B developers thanks to the NBFCs who funded them and that is going to be a challenge going forward.
On the commercial asset class, it has done exceedingly well. 2018 has probably been the best year ever, especially for rented out assets and there has been a lot of FDI investments that have come into that sector. Having said that, 2019 is going to be a very different year compared to 2018.
What might 2019 bring for the home buyer?
Jasuja: On the residential side, I would like to divide residential asset class into three buckets. The first bucket being of ready homes. As far as ready homes are concerned especially for the home buyers he should close his eyes and go and buy now. Probably it is the best time to buy. Ready real estate is doing pretty well. In fact, areas like South Delhi and certain other areas have started to appreciate even because there is very limited supply in the ready segment.
The second bucket is the under construction segment which has been launched over the last 3-4 years. That segment is not going to do so well. Please be very careful.
The third bucket is new under construction launches which have been done by category A developers, the Godrej, Mahindra’s and the Tata’s of the world, those are very safe. Those are being launched at a good price point and they are newer assets. So, those are areas where you can look at buying and there are subvention schemes available in those asset classes so that is something that you can look at.
On real estate what is your advise and right now we are talking about people who actually want to stay in the houses, we are not talking pure speculation or investments?
Bhave: Let us talk about Mumbai. Mumbai’s population is 22 million which is the same as the population of Australia. There are more people coming here and the only way to go up is vertical so in the long term, real estate is going to come back into a hot asset investment class but whether that will start in 2019 or 2020 that is anybody’s guess.
If somebody is looking for a place to stay I agree with him he should look at a category A developers and look at schemes where you actually pay only 20 percent now and you start paying the interest rate on the home loan after three years.
The question is should one wait for some sort of capitulation in prices as Samir also mentioned with the NBFC crisis and now that everybody is tightening their purse strings is it better to wait for a better time I guess?
Bhave: To get good returns you have to be always ahead of the curve. At Karvy Private Wealth, we are actually recommending people to look at real estate as an investment, start looking at it, there is no hurry. But you can’t just like in the equity market nobody can time the bottom in any asset class.
What are your hottest pockets in terms of geography for 2019?
Jasuja: As far as real estate is concerned I will go city wise. I think Bengaluru is a safe bet. It is doing pretty well, it is an end-user market and there is a decent amount of demand over there.
Other than that, from an investment point of view, I would suggest you could buy anywhere, you are going to get very good price points and probably the prices are going to inch up higher with respect to the ready segments.
We have discussed financial assets, physical assets like real estate and now it is time to talk commodities and the precious yellow metal -- gold. It is again volatile all over. In the last one year, it was above $1,300 per ounce for sometime and other time it was below $1,200, now somewhere at 1,250, what lies ahead?
Shah: As far as gold is concerned we have seen a very sluggish year mainly on account of two reasons stronger US GDP growth rate and Federal Reserve hiking the rate. These are the two main reason why gold could not perform well and India-China jewellery demand was relatively weaker.
But I think global economy has entered into unchartered territory with the Federal Reserve curtailing down its balance sheet, cutting down its balance sheet, with Federal Reserve moving up its interest rates throughout the last two years.
What is going to happen is anybody’s guess. We are entering an unchartered territory where ECB bond buying has stopped and all sort of uncertainty prevails in the market. In this kind of environment, gold is likely to perform extremely well.
I believe that 2019 is the year of gold and we remain very bullish on gold, we were bullish and we think that we have all the reasons to remain more bullish on gold because every month the liquidity is getting out of the system. $40 billion Federal Reserve is sucking very month and they are reducing their balance sheet and that is causing unimaginable volatility in all the financial instrument.
China is slowing down, US growth is expected to slow down. Global GDP is likely to slow down, so I think gold prices are going to definitely move up.
Let me ask you to put a number to that, how much in 2019, 10 percent maybe more some sort of an estimate?
Shah: I won’t be conservative because I think it is the right time for Indians to invest in gold. I am expecting conservatively gold prices should test $1,450-1,500 during the year 2019. Maybe during the first half, maybe during the second half but the stage is set and on Indian bourse considering the rupee volatility Rs 35,000-36,000 is on the cards for the gold in the year 2019.
Your thoughts on this and I will now broaden this, we have discussed all asset classes. If you are looking at the pie for the year 2019, personally and in terms of recommendation, what would you go with?
Bhave: Interestingly, though the gold prices went up around 7 percent this year, we have seen degrowth in the portfolios of gold ETF. As far as we are concerned, for a normal investor, the core would remain equity and debt but gold remains an integral part of the portfolio as a hedge and it is a crisis currency; if something really goes bad, is gloom and doom, we recommend typically 5-10 percent of gold and howsoever we might tell people not to buy gold, Indians will end up buying gold.
For HNIs, somebody can take a call and say that I am bullish and I want to invest in gold, but for a normal investor, we would say not more than 10 percent gold and most of that comes as jewellery already.
Beyond gold, are you expecting this glitter to spillover to any of the other precious metals whether its palladium, platinum, silver and also a word on base metals; as retail investors it is very hard for us to invest here unless we are in the Futures market and the commodities market, but what is the call?
Shah: Other precious metals also looks bullish along with gold even silver prices are likely to move up going forward. When you ask about another commodity complex, when you say it in a base metals and when you talk about energy complex; so base metals, we are not expecting any significant upside even though the supply side continues to remain weak in most of the metals. But the fact is that demand growth rate of China, which is consuming more than 50 percent of the base metals, is collapsing and even energy oil, the market is heavily supplied 1.2 million barrels of production cut is not going to take oil to again $80 per bbl.
So in commodity complex gold and silver are something one should watch out for. Remember, Donald Trump is also after the weaker dollar. Trump doesn’t like a strong dollar and 2018 belongs to him. So if the dollar weakens, it will shoot-up sharply. So gold and silver are the commodities for 2019.
As far as your personal finance portfolio is concerned, where are you putting your money in 2019? Give us an asset class break up?
Jasuja: I also happen to be an equity person. So I do dabble in the markets. I have an option on-call model that I run as well. Therefore, my preferred asset class would be equities in 2019 but I would be very careful.
What about you, are you putting all your money in gold or will you also look at equities or some other asset classes?
Shah: I never recommend to put all the money in gold but the allocation can be high. If your portfolio comprises 10 percent of gold then perhaps this is a right time where you can increase that to 15 or perhaps 17 percent. I think gold is definitely going to outperform for at least 2-3 years going forward.
So higher allocation to gold is something that I advise. I am not condemning the other asset class but gold has a better chance to outperform other asset class.
What are your personal choices and any advice you would like to give us?
Bhave: I will always put my money where my mouth is, so the majority of my money in the next year would go into equity either through mutual funds, portfolio management or direct stock. I want to make one point because that is what we are finding with a lot of our investors -- and I missed that in real estate and you will hear these terms going ahead on this show because there is a lot of interest on avenues like student housing, warehousing, co-working spaces and pre-lease commercial assets – that’s where people are putting in money.
But as an overall advice, I would say to be very careful, it’s your hard-earned money, look at asset allocation, equity overweight, look at all the products we have discussed, have gold as hedge in the portfolio and if you do not have it go ahead and buy the dream house.
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