'Don't put all your eggs in one basket'

"Don't put all your eggs in one basket" is one of the most meaningful tips when it comes to investing. Putting the money in different types of investment will prevent investors from incurring heavy losses particularly during the downswings.

That is so true, but choosing the right investment options won't be easy. The improvement in the economy has generally provided a better ground to obtain maximal returns but in certain conditions, economic stability cannot be taken for granted.

Noneconomic factors such as security and legal uncertainties are also important factors that could affect the investment climate. If there are security uncertainties during the upcoming general elections, for example, their impact could reverse the trend in the financial market.

At present, the most popular investment choices in Indonesia are time deposits and savings, bonds, stocks, foreign currencies and mutual funds.

Below are highlights of their past performance and how the financial policy and noneconomic factors could affect their potential returns.

Time deposits: This investment option carries lower risk compared to other types. Investors rarely suffer losses in investing in this type of investment, but high inflation could erode its potential returns.

The consistent drop in interest rates lately has, however, prompted many investors to switch their funds in time deposits into other types of investment such as mutual funds, bonds or stocks.

At present, the interest rate of one-month time deposits offered by major private banks and state owned banks range only between 7 percent and 8 percent, as compared to between 15 percent and 16 percent last year.

Bank Indonesia's recent statement that it would further lower the interest rate of its SBI promissory notes from the present level of 8 percent indicates that there will be another drop in the interest rate of the deposits and savings.

The interest rate of SBI notes, the central bank's instrument to control the money supply is generally between one or two percentage points above time deposits and savings. The cut in the SBI rate by one percentage point will lead to the fall in the deposit and saving rates by one percentage point.

The lower interest rate will further erode its return. The inflation rate fell to 5 percent last year from 10 percent in 2002. This year, the central bank has targeted to check the inflation rate at a range between 5 percent and 6 percent.

Based on the inflation rate of 5 percent (year-on-year inflation in January), the actual return of the deposits and savings range between 2 percent and 3 percent per annum.

If the fall in the interest rate continues, the returns provided by savings and deposits will be quite insignificant.

Bonds: This type of investment is not yet popular among individual investors. Besides being too expensive (each unit is generally sold to investors for at least Rp 100 million), the bonds are less liquid compared to other investment instruments.

As with fixed income investment options such as time deposits, bonds provide higher gain. It usually carries a yield coupon of between 1.5 percent and 2 percent above the average interest rates offered by state and major private banks. Like savings and time deposits, the actual gains of this investment option is much determined by the central bank's ability to check the inflation rate.

Like deposits, the potential returns from bonds this year will be also less promising due to the low interest rate.

Stocks: This investment choice offers two different types of potential earnings for its holders. One is in the form of dividends and the other is capital gain. If the company does well, the holder will receive a periodic dividend, or if the price of the stock increases, the holder will also earn capital gains.

Investors generally buy stocks to earn capital gain rather then the dividends. Stocks as an investment alternative have become more popular lately. Many investors have switched their investment in deposits and savings and other fixed income investment choices into stocks, to take the advantage of the stock market's impressive performance during the past several months.

The fall in the interest rate, the stronger rupiah and the improvement of the other economic indicators have been the major factors in the surge of stock trading. Other important factors include the inflow of short-term investment from foreign fund managers. In fact, 80 percent of the transactions at the Jakarta Stock Exchange are still controlled by the foreign buyers.

The renewed trading activities have contributed to the significant increase in prices of certain stocks, especially those issued by major companies. After being dormant for almost two years, the stock market began to show its strength in the middle of last year.

The Composite Index of the Jakarta Stock Exchange (JSX Composite Index), the main barometer of the share price in the market closed the year at 691.89 percent from 425 at the end of 2002. It means that the book value of the investors' shares during 2003 increased by 60 percent.

The buying spree continued in the New Year as investors put more money in the stock market with the expectation that the country's economy will be better this year. The optimism further pushed up prices which then led to the rally in the JSX Composite Index. The index broke the 750 psychological barrier in early February for the first time in four years since 1999 on the wake of strong buying by both local and foreign investors.

Securities analysts estimate the index will continue to increase and break the 790 mark by the end of the first or second quarter of this year.

The only factor that could affect the upward trend in the stock market is the possible political conflicts in the upcoming general elections. In fact, there are some concerns that political rivalries among political parties either during the general election in April or in the country's first presidential race in July could escalate and affect stability.

But securities analysts dismiss such fears. Even if there is a political conflict it will not cause wide spread social unrest as took place in May 1998, which led to the downfall of the former dictator Soeharto. In fact the sporadic unrest following the general election in 1999 and the forced removal of former charismatic president Abdurrahman Wahid in June 2001 had no serious affect on the stock market.

Like the rupiah, which has been getting more and more stable since early last year, the stock market also seems to be more immune to bad news coming from noneconomic fields.

The JSX Composite Index, for example, suffered a decline of only 15 points in the wake of the explosion of a bomb at the lobby of J.W. Marriott Hotel in Jakarta on Aug. 5 2003. In comparison, the index dropped 31 points following the bomb blast in the JSX building in September 2002.

Foreign currency: The strengthening of the economy and relative political stability over the past two years have changed the trends in foreign currency trading.

The recent stability of the rupiah and the lower returns provided by U.S. dollar-denominated deposits and savings have prompted dollar-minded investors to switch their investments into stocks or mutual funds.

A great amount of local funds "parked" in overseas banks have also been reported to have returned home to tap into the growing optimism in the country's stock market.

According to Bank Indonesia, the rupiah, which is now about Rp 8,500 per dollar is at its best level ever recorded since the crisis. The main factors that contribute to the strengthening of the currency are an improvement in the country's credit rating, an increase in foreign reserves, the relatively higher interest rates offered by local banks, plus the depreciation of the dollar on the world's financial markets.

The central bank estimates that the rupiah will remain stable this year and stay within the range Rp 8,200 to Rp 8,500 to the dollar despite some concern over political and security uncertainties during the upcoming general election.

"We have experienced nine general elections and none caused social unrest," said Bank Indonesia Governor Burhanuddin Abdulah recently, dismissing public concern at the potentially negative impact of the elections. Like the stock market, the rupiah seems to have been more immune against noneconomic factors lately. The Marriott hotel bombing had little negative affect on the fluctuation of the rupiah against foreign currencies.

Like the central bank governor, many foreign exchange trading analysts also believe that the rupiah exchange rate will remain stable at current levels, despite the general election.

Mutual Funds: These investments are becoming more and more popular as many Indonesian investors seek a new alternative investment in the wake of a persistent fall in interest rates.

Mutual funds can offer the advantage of diversification and professional management. But as with other investment choices, investing in mutual funds is not risk-free. There are also a number of fees that can be imposed on mutual fund holders. Therefore high fees could erode the potential returns.

During the past two years, fixed-income mutual funds, which are generally invested in time deposits and either corporate or government bonds, were among the best investment choice. With the expertise of the fund managers in selecting less risky but high- yielding bonds, this type of mutual fund provided an annual return of four to five percentage points on the average interest rate offered by banks.

The potential return of fixed-income mutual funds will likely decline this year in line with the expected further drop in the interest rate. The investors' gain from this type of fund is much determined by the fluctuation of the interest rate.

Unlike fixed-income mutual funds, interest on stock-oriented funds is on the increase. Although more risky, this fund option, which is largely invested in shares traded on the stock market, has become the highest-yielding investment alternative, thanks to the sharp increase in share prices on the local stock market during the past few months.

The annualized returns provided by existing stock funds as of Feb. 16 ranged from 30 percent to more than 100 percent. They are quite higher compared to other investment options. The future potential earnings of stock-oriented funds will, however, be determined by the performance of the stock market and the expertise of fund managers in selecting the stocks.

Foreign currency-based funds are not as promising as they were a few years ago. This pool of funds is generally invested in foreign currencies, particularly in U.S. dollars. The stronger rupiah and the depreciation of the U.S. dollar on the world's financial markets have rendered this investment choice less attractive.

The existing foreign currency-based funds offer returns of 8 percent to 12 percent per year. An expected further improvement in the value of the rupiah could further diminish investors' potential gains from these funds.