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Equity Investors Need to be Cautious, Gold, Mutual Funds Good Options in New Year, Analysts Say

© AP Photo / Rafiq MaqboolAn Indian stockbroker looks at a trading terminal at a stock brokerage in Mumbai, India, Thursday, Aug. 22, 2013
An Indian stockbroker looks at a trading terminal at a stock brokerage in Mumbai, India, Thursday, Aug. 22, 2013 - Sputnik International
Indian equity markets have experienced a meteoric rise since the lows witnessed due to the COVID-19 lockdown in March of this year. Immense liquidity has translated into lower returns on fixed bank deposits, while gold is losing its shimmer after an initial rally on the back of pandemic uncertainties.

Sipping their tea together at a roadside eatery in India's Noida months after the COVID-induced lockdown, two men in their late 20s on Friday were exhuberantly discussing the prospects of investing in the stock market.  

Both excitedly debated which shares to invest in for double returns in the next year.

Talking about the share trading that happens in Mumbai, where India's major stock exchanges are located, one of the men tells the other: "In Mumbai, most of them do a lot of trading. We should rather focus on investment in shares with savings outlook for a couple of years. Even if that gives an average annual return of 20% percent that should be good enough. Investment in small stocks may also double our investment in one to two years".

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Listening to him intently, the other person seems to have agreed with the idea, but still has his own suggestion: "Look, one should remain cautious while investing in smaller stocks. But yes, we can put our bets on bigger blue chip companies, which are available at a good price".

Indian equity markets have had a phenomenal bull-run since the benchmark indices fell from a peak early this year due to the COVID-19 fallout.

From a high of over 41,000 points in February, the Bombay Stock Exchange's 30-share benchmark index, Sensex plummeted to 25,981 on 23 March, registering a crash of 30 percent. The index has since revived almost 80 percent, trading at 46,624 points.

All this while returns on fixed bank deposits have come down due to excess liquidity pumped in by India's banking regulator, the Reserve Bank of India, to ensure stability in financial markets since March of this year.

So, what is a good option for investors as the New Year 2021 sets in?

Market watchers and analysts believe that volatility will continue, but one can pick value stocks when they dip.

"We expect volatility to remain high in the near term for the next few weeks. Buy on dips would be the suggested strategy. Staggered buying and disciplined trading is the best strategy in volatile markets", Sahaj Agrawal, Head of Research-Derivatives at Kotak Securities, tells Sputnik.

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In effect, while equities have given an almost a thirteen percent return when compared with December of last year, fixed deposits in banks and post offices are offering lower returns owing to ample liquidity in the financial market on the back of successive rate cuts by the Reserve Bank of India (RBI).

A fixed bank deposit in India's largest public sector lender, the State Bank of India, now offers a return of 4.5 percent compared with 6 percent a year ago.

Similarly, key deposit schemes in post offices like Kisan Vikas Patra, National Savings Certificate, and recurring deposits, among others are offering lower rates than last year.

What Are the Options for Investors in These Small Savings Schemes?

Delhi-based senior financial journalist Deepak Joshi opines that elderly people, who want to preserve their savings must opt for senior citizen savings schemes or public provident funds (PPF).

"Senior citizen savings schemes offer a return of 7.4 percent, which is a good return during a pandemic. PPF is good for young investors who want fixed returns and a lump sum amount as the investment in PPF fetches compound interest".

Investment and personal finance adviser with India's largest public sector insurance firm, the Life Insurance Corporation of India, Manoj Thapliyal believes some select mutual funds can achieve returns that are higher than the bank and post office.

"Debt mutual funds having exposure to corporate bonds could also be a good idea to earn more returns than bank and post office FDs. Blue chip mutual funds and gold bonds could also be a good option", Thapliyal tells Sputnik.

Journalist Joshi, however, cautions that Indian equity markets may be overvalued as foreign institutional investors are pumping money into them, taking the bourses to new peaks almost every other day. Foreign investors have made investments worth $4.92 billion in the Indian equity market to date.

"Those investing in stocks have to be really careful as the key indices may have peaked, and see corrections going forward", Joshi adds.

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