What To Do With Your Money Right Now

My friend, Ranjan Bhattacharya, 52, retired from the Navy about a year ago, after serving in submarines, arguably one of the world's most isolated jobs. Post retirement, he's made up for lost time by turning into a news junkie. In this time, he's acquired a large portfolio of small, obscure stocks. Watching the TV market shows, he follows recommendations and buys.

Another friend, Abhijit Banerjee, 61, is worried if the government is really going to seize his fixed deposits and convert them forcibly into bank shares. Like other 60-plus people, he keeps a lot of money in the bank in case of medical emergencies.

These instances reflect typical middle-class attitudes and concerns about personal finances. Lakhs of people who had not heard of the stock market a year ago, now believe "mutual funds sahi hai" and blindly buy TV-recommended shares. And, the infamous bail-in clause in the new Financial Resolution and Deposit Insurance (FRDI) Bill, which allows the use of the money of depositors to bail out loss-making, ailing banks, has struck fear into the hearts of many who are still recovering from the shock of demonetization.

So, what should you do with your savings in 2018? By the time you read this, there may be significant changes to the tax system, but the advice will remain the same in broad terms.

Spread your money across asset classes. Put some savings into debt, invest some in equity, and make sure you have enough insurance to cover emergencies and take care of your family. Also consider putting some savings into gold and real estate. Avoid cryptocurrencies -- unless you're tech-savvy, be prepared to lose vast amounts. Here's a quick tour of the various options.

Debt: Debt comes in many shapes and sizes. Bank fixed deposits are the default option. You can also buy mutual funds dealing in different types of debt. In addition, you can buy corporate debentures, or subscribe to corporate fixed deposits.

There's a key counter-intuitive aspect to understanding debt. If interest rates rise, any portfolio of previous debt instruments loses value because that same money could now be earning more interest. Conversely, a portfolio gains value if interest rates fall. So rising rates are actually bad for debt investors. A more sophisticated understanding: interest rates rise when inflation rises. If inflation rises, the value of money erodes faster. Interest rates (and inflation) are expected to rise in 2018. So debt may not give great returns.

Debt returns and associated safety varies with the chosen instruments. Bank fixed deposits are safest but also liable to give the lowest returns due to low rates of interest. Even bank deposits are not totally safe. The new FRDI Bill highlights the fact that bank deposits are not guaranteed beyond the limit of Rs 1 lakh. That limit was set in 1993 when Rs 1 lakh was worth Rs 10-11 lakhs in today's terms.

In theory, if there is a bank collapse, deposits beyond that level are at risk. A failing bank might use the bail-in clause to hold up payments, or convert such savings forcibly into shares. Of course, any government would be very reluctant to take this step, fearing a political backlash. But it is true that many banks (especially state-owned ones) are struggling to cope with bad debts. So bail-ins are now neither impossible, nor illegal.

Mutual funds trade debt instruments, to exploit changes in interest rates. Safety varies, depending on what the fund holds and how effectively it trades. Money market funds are liquid, very safe, but give comparatively low returns. Funds that focus on corporate debt give much higher returns but take larger risks. It's important to understand that you can lose capital in a debt fund. So look carefully at the track records, the mandate and the portfolio.

Real Estate (RE): This is entirely a local market. There could be a boom in one neighbourhood and a bust in the next. Overall, the industry is in poor shape. But new legislation, which led to the establishment of the Real Estate Regulatory Agency (RERA) and tax breaks could stoke a revival. One problem with RE is that it's a large, lumpy investment done once in a lifetime by middle-class folks.

The REIT -- real estate investment trusts -- could be an entry point for investors who want to park small sums in RE. A REIT is like a mutual fund. It sells units to small investors and invests in RE. New norms could help this asset class grow. As and when REITs do get off the ground, take a look. For example, a REIT may give a safe, regular income with a higher yield if it holds commercial properties and earns regular income from rentals, making it a good alternative to debt.

Gold: Precious metals are the age-old hedge against inflation and uncertainty. But gold yields no interest and capital appreciation is uncertain. Also, making charges for jewellery add considerably to cost. It's still worth investing a small amount, as security. Consider silver -- it is more linked to industrial recovery -- and buying shares in gems and jewellery businesses instead. The performance of these companies are linked to gold prices, many are profitable with good export profiles, and they offer dividends as well as capital appreciation.

Equity: The last two years have seen terrific returns from the stock market. Is the economy booming? No, but a lot of investors hope that it will start growing faster. The World Bank and other institutions concur that growth should accelerate in 2018-19. Many savvy investors have already entered the stock market on that expectation. As more money has come into the market, it has boosted share prices and created a positive feedback loop where investors have pumped even more money into stocks.

People have invested directly in stocks. They have also invested via equity mutual funds. The first option is for those who have time and inclination to do their own research. The second route is fire-and-forget. Both methods can fetch great returns. Both methods also carry the risk of capital loss.

My advice would be to stick to mutual funds and commit to systematic investment plans (SIPs) for three years, or longer. These are likely to fetch excellent returns.

Don't expect super returns in 2018. The economy may recover. Though it's very likely to happen, it's still uncertain.

What's certain is that there are a series of assembly elections and a general election scheduled in the next 18 months. Political uncertainty might cloud short-term returns. The market fell 2 per cent in 15 minutes fearing that the BJP might lose the Gujarat assembly elections, even though Gujarat is a small state with just 5 per cent of Lok Sabha seats. What happens if there are apprehensions that the Narendra Modi government will not return?

Insurance: Insurance is a bet you want to lose. You don't want your loved ones to claim on your life insurance policy. Don't mix that up in your head with trying to make money.

Don't buy equity-linked insurance schemes such as unit linked insurance plans (ULIPs). ULIPs carry massive commissions, which is why the agent will try to sell them to you. But they are losing propositions, precisely because your money goes to the agent and the insurer and not into your investments. There is rampant mis-selling in this space.

Instead, buy either term policies (these are the cheapest) or buy money-back schemes, which are also cheap but you get your money back. If you need to, do it yourself. If not, read the fine print very carefully rather than trust an agent's verbal assurances.

PPF and the National Pension Scheme: The Public Provident Fund (PPF) is safe, and you get a guaranteed return. That return rate is set every quarter. So this is like a fixed deposit with a tax break (up to a limit) and it compounds.

Consider the relatively new National Pension Scheme (NPS) as an alternative. The NPS may actually give you considerably better returns than the PPF. It offers more control over asset allocation because you can buy a mix of equity and debt and other assets. However, the NPS also has a longer lock-in. It has an unusual exit policy, in that some of your corpus will be converted into an annuity. It is still worth checking out because of superior design.

Finally … Don't keep all your eggs in one basket and invest for the long term. The next year is guaranteed to see lots of market and business volatility due to the political situation. It is perfectly possible, indeed likely, that the government will try another shock-and-awe scheme like demonetization if it thinks that will win votes. So do not be surprised if there are stock market crashes or confused economic messages from a government seeking re-election. Give things time to settle down.

Cryptocurrencies

Bitcoin, Ripple, Ethereum and other exotics have zoomed in the last two years. In 2017, Bitcoin was up 2,000 per cent, Ripple was up 20,000 per cent (that is, the price has multiplied 200 times). So you might be tempted to buy these. But here are the caveats:

• There are hundreds (literally) of fraud cryptocurrencies and fraudulent schemes.
• The regulatory situation is uncertain. Most nations including India are still wondering what to do about regulating them.
• You will be asked questions by the taxman.
• It's normal for "cryptos" to fluctuate 20 per cent in a single day. You could lose that much instantly. If you lose or forget the password to your digital wallet, or you're hacked, your investment goes down the drain. There is no redress, no recourse. Your money has evaporated.
• Trades can take hours, or even days, to confirm. So you may not know if you've traded for sure.
• If you can handle uncertainty and you don't mind gambling, go ahead. Please check first if the cryptocurrency is genuine. A website like coinmarketcap.com can be helpful.