The Government of India, through Reserve Bank of India, has called back the Rs 500 and Rs 1000 notes on 8Th November 2016. The banks are witnessing heavy pressure in their daily work as RBI is changing or depositing the discontinued currency through its network of banks which have around 2.5 lakhs branches. This process of demonetization has been debated a lot and we all know that despite initial hassles, the country is all set to realize its original GDP by abolishing or minimizing black money economy, corruption and funding to terrorist and illegal trades.
More than a month has passed since the demonetization decision and people have solved or planned to resolve the cash in hand problem. But what about investments? If you have already made investments in share or mutual funds or property, what do you see the returns will be after all this settles down? All avenues will have a different effect and the intensity will also differ. That is why diversification is a must for a healthy portfolio.
If you have divided your portfolio in various financial and physical assets the impact will be limited but if you are investing in just one or two avenues the risk of losing is more. Although if these one or two investments have gained by recent phenomenon it is more of luck or mere chances and not careful planning as returns may reverse in future. Hence spread your investments.
To know what will be the impact of demonetization, let’s try to know what will change in the economy in short and long term.
Changes expected in short term
- The economy will be sluggish in short terms as the economic activities will slow down as cash availability will be less in first 50 days. People will try to postpone their big purchases as they will struggle to move to digital economy from cash model. Also in absence of any festive season, the markets will find hard to move inventory and raise cash.
- As consumer spending goes down, it could impact GDP growth numbers for next 2 quarters. FIIs and stock market investors may reduce investments in stock markets and this will bring volatility to the share prices.
- Bank will have huge cash, hence they will reduce deposit rate and loan rates. Already until 05 Dec , the banks were on11.5 Lakhs crore of excess deposits.
- Inflation will come down, but we may see prices go up and down for some commodities on account of shortage rumors or transportation
- Liquidity disruption will make real estate sector unviable for the transactions and this will make it fall sharply.
- The gold and diamond prices will surge in short term as people will try to convert the old currency into these. But the government will keep an eye on these transactions.
Change expected in long term
- The RBI liability will reduce due to excess cash and fiscal deficit will come down or turn positive for the year. This means that India will attract more FDI and FIIs money and which will boost stock markets and economic development, especially
- Huge money will shift from physical assets like property to equity markets. This will boost help stock markets touch new highs.
- The currency will be stronger as the economy will rise and inflation shall be in controlled range.
- Since the lending interest rates will go down the corporate sector will have access to low-cost funds and their cost of production will decrease. This will impact their share prices positively.
Impact on various investments
Direct Equity: The markets will have huge liquidity when this phase passes. The corporate sector will get huge benefits of low-interest rates and their share prices will rise. The sectors like Banking, Infrastructure and manufacturing will gain. Sectors like Information Technology and pharma will be slow or negative due to change in government in the USA. An investor who do not understand equity or who do not have the risk appetite for it should not invest directly. They may seek help from financial experts and invest trough equity mutual funds.
Equity Mutual Funds: As the stock markets will be the biggest beneficiary, the equity mutual funds will have a huge positive impact. One must continue to invest through SIPs and as per his goals. The NAVs will fluctuate in short terms but will get stabilize soon.
Debt Mutual Funds: As the government will have huge liquidity, it will not borrow much from the market and this will bring the rate of government bonds down. This means the prices of already issued bonds will rise and hence debt mutual funds with long maturity will give very good returns. Also, interest going down will help their NAVs to increase.
Real Estate: This sector will have a huge negative impact as the transactions involved black money and this will not be available for builders and developers. They will have huge pressure to sell already developed projects and this will crash prices to 20 to 30% depending on property and location.
Gold: The price impact will be negative to neutral. On one hand, the low black money will decrease the demand . But few who will still prefer to keep black money will try to keep gold instead of cash as more denominations can be changed by the government. Also if inflation increases a bit in short term, the gold prices will benefit.
Fixed Deposits: The banks will have huge liquidity, so they will decrease the FD rates. Already the rates have gone down by around 3 percent since last year. The company FDs rate will also follow a similar trend as they will get cheap lending from banks. The time will be difficult who want fixed and secured returns especially retirees. Based on your risk taking ability, shift investments to Bond Funds from Mutual Funds.
What should you do?
For new investors, this is a systematic opportunity to build your portfolio in equity and debt. If you are a retail investor, mutual funds will be the best way to invest. Do not put all the money in one go. You should consult your financial planner to know what amount of your entire portfolio should be invested in equity and debt and use this time to systematically invest and build the desired portfolio.
If you are already invested, the short-term volatility will soon pass. Remember Brexit? Stick to your long-term investment strategy and do not do anything unexpected. For bank FD holders the returns will be low and will just beat inflation marginally, hence move to dynamic bond funds and accrual funds from mutual funds. The investors in real estate will face a downturn for 1-2 years but that will also again rebound in long term.
Overall, the diversified portfolio will is recommended and one must invest keeping the long horizon in mind in all the avenues. We have been hearing a lot of schemes luring depositors to buy in equity or property using the old currency. All these are illegal and one must avoid greed. This will also help you to avoid future scrutinies and penalties.
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