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Jul 12, 2012, 08.23 AM IST
Despite the not so good returns from SIP investments or equities, Rajiv Bajaj, MD of Bajaj Capital feels that investors must take a fresh look at the world of investments. According to him, SIP is an investment option and an investor must see at least one complete cycle consisting of upsides and downsides in the market to realize gains
Despite the not so good returns from SIP investments or equities, Rajiv Bajaj, MD of Bajaj Capital feels that investors must take a fresh look at the world of investments. According to him, SIP is an investment option and an investor must see at least one complete cycle consisting of upsides and downsides in the market to realize gains.
"SIP is a product which helps you right through the volatility in equity markets. Common sense is that you have to see at least one complete cycle to see the real performance of SIP. One complete cycle in this case would mean if you bought it in 2004, it's seven-eight years. That would be one complete cycle because you saw one bull run and you have seen one down cycle. And that should give you a fair idea of what a SIP should return," explained Bajaj.
In an interview wtih CNBC-TV18, Bajaj further elaborated that volatility in equity markets can be tackled by investments through the SIP route. "Keep investing in equity through SIP route, don't break your SIPs," he advises.
Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: What exactly is happening with SIPs because we hear that it has completely fallen off the radar? In fact a lot of institutions have had to cancel or withdraw their SIP offers.
A: My first advice this morning to investors would be to take a fresh look at the whole world of investments. Starting with your question on SIP - what happens is that we meet a lot of people and hear a lot of noise. We get cluttered by it and end up taking the wrong decision. SIP as an investment option. Whenever you bought it, three years ago, five years ago, seven years ago, your investment advisor should have told you that SIP is a product which helps you right through the volatility in equity markets.
Common sense is that you have to see at least one complete cycle to see the real performance of SIP. One complete cycle in this case would mean if you bought it in 2004, it's seven-eight years. That would be one complete cycle because you saw one bull run and you have seen one down cycle. And that should give you a fair idea of what an SIP should return.
If you see SIP returns over last five years, market has only been down and just moderate bouts of recovery have happened. Therefore, SIP will not show appropriate returns. Right now when people see SIP returns over the last four-five years, they see neutral or marginally negative return and they end up drawing wrong conclusions.
Hence, buy the right product for the right reason with clarity in your head about how long you should be holding it and for what reason you are buying it.
Q: Is equity in any instrument drawing any interest, whether in the form of a mutual fund product or otherwise because there is some interest coming into the midcap category as well. Are you beginning to see some of the thematic funds get some interest?
A: Equity is a tough ask at this point of time and I am with the investors. If I have to put my own money, I am not sure whether the markets have bottomed out or they will bottom out six months, one year, two years from now. Hence, I should have an exposure to equity markets because we as a house and I as an investor am a long term believer in equity.
Therefore, the only logical route is to come in through SIP. That's what we are advising our clients right now. Keep investing in equity through SIP route, don't break your SIPs. It is the main message I want to put across.
Q: What about debt because that has really been the key competition for equity products through the last couple of years but we hear that even Fixed Maturity Plans (FMP) are not getting that much interest any more?
A: It is very obvious that FMPs would have fallen off the cliff in the last few months. The fact of the matter is that FMPs will not manage the mark to market gains. If the interest rates suddenly start coming off and the gains you will see in the bonds, the FMP will not capture that because it gives you a locked in return.
At this point of time, medium term and short term debt are better alternatives. That’s where the investor money is going. We are seeing tremendous interest from investors in these instruments because they are tax efficient as compared to bank deposits and other fixed income instruments.
There is a lot of money flow and their six months-one year returns have been very healthy. Investors have been getting 9-10% returns and they are very happy and comfortable coming into these instruments.
Q: What's coming up next in the tax free bond pipeline? What would you recommend and what kind of yields are these being offered at?
A: The budget has set out an agenda of Rs 60,000 crore of fund raising. The same institutions like NHB to REC to NHAI which came in last year have been allowed by the government to raise money through tax free bonds. So there are five to six institutions who have been allowed to raise money.
The last set of bonds came at about 8.3% return. Seeing the current interest rate scenario, what we hear from the market is that the first set of tax free bonds should come in by the end of August. You should expect returns anywhere between 8-8.15% in the current scenario if let's say, an issue were to open today, this is the kind of interest rate you could expect.
That is a pre-tax yield because these are tax free bonds and if you are talking about a pre-tax yield of 11.5-12% which is very attractive for investors. It is at least 2-2.5% over the bank deposit returns. Therefore, no wonder, these bonds are getting very good response from investors.
Q: Just to switch to another asset class for a second, a lot of the gold ETFs have seen redemption through the last month or so. Has that been your experience as well in terms of gold SIPs or gold funds? Is that not such a lucrative idea anymore?
A: Gold is a product you buy to hedge inflation and it has given fantastic returns over the last few years. But last three months, gold has been volatile along with the currencies. There is no surprise in that.
Therefore, people again take knee-jerk short term decisions. What we have been telling our clients is that gold is something, depending up on your belief in it, deserves 5-10% of allocation in your portfolio and you must continue to allocate in it. We are of this view that gold also should be bought through the SIP route because gold is essentially an accumulation product.
You accumulate gold for a special occasion in your family or daughter's marriage, etc and it's a great hedge against the global volatility. From that point of view, there are some very good instruments which allow you to buy gold now through the SIP route and that's what investors should be considering.
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