Investment strategy: Past was not perfect, future also looks tense

All of us make mistakes. And investors make more mistakes. The big question on every investor's mind is: How will 2012 pan out? Will they be able to stage a comeback in the new year? The year 2011 was mostly a forgettable one for investors with interest rates shooting to unmanageable levels, inflation soaring, gold prices going through the roof, equity markets in negative territory and rupee devaluation, among others.

It's time once again for introspection, calculation, drawing new strategies, sensing opportunities and learning from past mistakes.

The uncertainty in developed markets like Europe and the US and possibility of countries like Greece, Italy, Spain and Portugal defaulting on their sovereign debt obligation leading to another slowdown loomed large throughout 2011. The uncertainty is expected to continue for another 12 to 18 months. While the path looks difficult to tread, it does provide several investment opportunities. Let us have a look at some of them.

Debt

Bond prices and interest rates have an inverse relation. When the interest rates fall, bond yields too fall. However, their prices increase which leads to better returns whenever the interest rates are on a downward spiral and give investors an opportunity to tap short-term gains. Starting from March 2010, Reserve Bank of India (RBI) raised key interest rates 13 times to tame inflation and curb consumption demand.

With the clear signs of high inflation tapering off and focus back on growth, the RBI would most likely start cutting interest rates in the next 3-6 months. Bond markets seem to have sensed this as, according to Morningstar India (a mutual fund research company), the gilt fund return from last month itself was a whopping 3 per cent. For those sitting on cash, planning to make some money in the short term, may look at investing in debt products like gilts which predominantly invest in the government securities.

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