Smart ways to invest and attain early financial freedom

Let me start by wishing all my readers a very happy, prosperous and fun filled year ahead.

This business of forecasting next year has become a big industry now. Many people (including me) write about it in December end.

But deep down, I have my doubts.

Will things really change between Dec 31st and Jan 1st?

I do not think so.

Just because the earth rotates around the sun once in 365 days, we tend to think in chunks of 365 days – for example

ROI is an annual number (a 20% ROI means 20% per annum),

our salary is an annual number,

and even companies declare annual results.

But we all should recognise that this construct of measuring performance annually has its own limitations. When it comes to economic factors, nothing much changes in a year. What happened in 2015 will continue to happen in 2016 - small changes will take place and slowly the direction will change – but there won’t be any drastic changes.

So here are my big picture thoughts:

  • The global economy will continue to sputter, as it has been since 2008 –US economy will slowly improve over the years – driven by innovation; Europe and Japan are in zero growth mode; slowdown in China due to the slowing down of exports is surely going to continue; Commodity exporters like Brazil, Australia, South Africa and the Middle east countries that export oil will surely be hit in a slowing world; India is a domestic consumption plus export story – the domestic consumption is growing but the exports are down 20% in 2015. We are in a long term slow growth phase globally since 2008 and it will take a few more years to come out of this.
  • So in this scenario, what is in store for India?  I believe that India is on a decent wicket right now. There is hope -  despite all the negative news on the TV channels. The growth in top line and bottom line of companies have not yet picked up. However, I am optimistic that in the coming year, we will see growth in top line and bottom line of companies.
  • Investing in Debt instruments - I believe that RBI will reduce rates further in the second half of 2016 – this means that investing in long term debt mutual funds in Q1/Q2 will give better than normal returns of about 11% (pre-tax) in 2016 – so if you have one year FD’s, you would do well to move them to long term debt funds – the funds that I would recommend are Kotak Bond –Plan A or Birla Sunlife Income plus –B or Reliance Dynamic bond.
  • Investing through equity mutual funds – I surely recommend MF's for everyone who does not do direct equity investing. The funds that I recommend have not changed much for the past three years – I recommend Reliance Pharma fund and HDFC Mid cap opportunities fund in the higher risk/return space and HDFC Top 200 in the lower risk/return space.
  • Investing in Direct Equity –I believe stock market returns in 2016 will be better than in 2015. In 2015, the Sensex is appx (-) 5% - In 2016, I believe the Sensex will do between 10% and 15%.  As always, stock selection is the key. I recommend that you look at a time frame of 10 years and invest in great companies that will grow and become stronger players in the coming decade – companies like HDFC Bank, Asian Paints, Pidilite etc– by investing for a ten-year time frame, you will surely make 15-20% returns per annum in stock market.
  • Investing in Gold – I believe that Gold will not give more than 10% in India. The global price of gold (in USD) will be range bound and the rupee devaluation against dollar will be the reason for any gold price increase in India – that will be not more than 10%. So investing in gold is not recommended
  • Investing in Real estate – this asset class takes longer to go down or go up. We have seen three years of hardly any capital appreciation in real estate assets. The situation would not improve this year. The government is actively curbing black money transactions (and I like that) and that will surely impact real estate demand in 2016. Will the prices come down? I do not think so. But will the prices go up? Very unlikely. In this situation, I would recommend that you invest in urban land – that will surely give good returns – but beyond that, be careful and only invest after researching the location and the developer credentials well.
  Where am I planning to invest in 2016?    

I am considering selling one residential property and investing that money into one tenanted commercial property in Bangalore –this will double my rental returns as residential properties give a rental yield of 3-5% while commercial properties give a rental yield of 8-10%.

I am also investing as an early stage investor in a service apartment complex in Bangalore – this complex will be ready in 2018-19 and will hopefully give 10% plus rental returns from then on.

I will surely put more money in stocks – currently 50% of my stock investments is in six companies (appx 8-10% each) – Asian Paints, Gruh Finance, KRBL, Page Industries, Pidilite and Sundaram Finance. My other current favourites (appx 4-5% each) and where I am increasing my investments are HDFC Bank, Havells, Igarashi motors, Nandan Denims and SKS Microfinance – these are the likely companies where I will put more money in 2016. I did not find any great stocks in 2015. My last two stock picks– Mahindra and Mahindra and Titan Industries – have not performed well in the past year. I hope to invest in my existing stock picks as I know these companies well.

Author Description

S. G. Raja Sekharan

S. G. Raja Sekharan is a visiting MBA faculty, a mentor to budding entreprenuers, a wealth management consultant, an author of a book on Investing in India and the author of this blog.

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