Where to look for returns in 2015

The year 2014 has been an eventful year. After taking charge, the new government made all the right noises about sweeping market reforms, and the markets proved equally responsive with nifty/Sensex clocking 30% return 2014 YTD and the overall markets delivering even higher returns.
This saw investors flocking the markets, as is the usual trend. Whenever markets go up, retail participation goes up as investors are interested in making short term capital gains.The same set of investors is nowhere to be seen when markets are not doing well. This means that they are either not investing or are investing at higher levels and ending up making some gains or maybe no gains. When the markets start going down they panic and exit with a vow to never come back. This pattern is so familiar that it is hard to find investors who come with the objective of creating wealth over long term.
So what’s the solution? The answer is surprisingly simple but not exciting and maybe that is the reason why investors don’t follow it.
Understand your risk profile. There are three pillars of investment which can be helpful in deciding your asset classes — risk, return and liquidity. Their order needs to be arranged on the basis of priority to decide the investment. So if you have a short-term need, you need to have high liquidity, low risk with the returns being the last in the order. Likewise any long-term need, you should target high returns, can take risk (here your risk profile will be of importance) and liquidity gets the lowest priority. Hence, even when investments are not doing well due to unfavourable market conditions, you can hold on to your investments. But in which direction should investors be looking for opportunities? All asset classes have their own merits and demerits but here are a few pointers.
Public provident fund (PPF)
This continues to be a good investment option in the debt asset class. A safe investment offering a tax-free return of 8.70%, PPF carries a lock in of 15 years with an option of partial withdrawal after the end of 5 years.
Fixed deposits
A good option for those with a low marginal rate of tax as well as those who want to create a liquid corpus.
Funds
Debt — this asset class has been seeing a steady increase in ownership both by corporates as well as individuals. Loosely called debt mutual funds they have many categories under their umbrella: Ultra-short term funds: These can be used for parking funds for very short term and are mainly used by corporates and High Networth Individuals (HNIs).
Short term funds: They can be used to create a liquidity corpus and offer tax efficiency if held for long term (more than 3 years).
Fixed Maturity Plans (FMP): Similar to fixed deposits these aseets, as the name suggests, are close ended and do not offer liquidity. But they do provide tax efficiency, thereby, making them superior to fixed deposits if liquidity is not a priority.
Long-term debt funds: The funds offer exposure to long-term corporate debt but being long term are subject to volatility and are recommended only for long-term investment.This asset class (except FMP, as they are locked in at a fixed rate of interest) does well in declining interest rates scenario which could well be the case for the year 2015.
Equity
2014 has seen a solid performance by equities after many years. It will be prudent for investors to come with a measured expectation for the years going forward because it is an inherently volatile asset class. And do not expect of a repeat of 2014.
Equity mutual funds are a recommended option, and new as well as existing investors can use the Systematic Investment Plan (SIP) route. There are various options available within equity mutual funds across market capitalisation. Large-cap funds, multi-cap funds, mid-cap funds, hybrid funds are various categories available and a combination of these can help you create a good portfolio mix. The core of the equity portfolio can be multi-cap strategy as it allows the fund manager to create a portfolio across market caps. Hybrid funds offering a combination of equity and debt gives debt exposure with taxation of equity and can be part of the overall portfolio.
And in the overall picture make sure you have covered your insurance — both life as well as health Insurance.
Bhatia is managing partner, Asset Managers