Making an investment decision is indeed a challenge given the uncertainties that prevails due to the ever-changing trends for different asset classes. But, then again each year, one has to plan an investment, be it short, medium or long term.
According to Tanvi Kejriwal Goyal, MD, Wealth Aware, “An average employee’s one third of a day’s productive hours get wasted in financial worries. If we can create a robust road map to our future financial needs, then we would really start enjoying and living in the moment.”
She puts forth the three step formula to wealth management. First, set a sensible target. Second, build a strategy to reach that target. Third, execute it and then review once every year.
It is not so easy, especially in a year that will witness general election and possibly a fresh government by May. According to economists and market experts, one other uncertainty that is likely to continue for a few more months is, volatile market due to domestic and global developments.
“Short-term volatility, ensuing general elections and how the new government will approach the economy, all of these queries have a common underlying theme – uncertainty,” said Ashish Shanker, Head-Investment Advisory, Motilal Oswal Private Wealth Management.
So what should be the investment avenues that an individual investor should seriously consider in 2019?
“If you have invested based on your goals, remain invested and continue further investments like SIPs as per your plan. If you are not sure about your investment horizon, it would be best to stick with ultra-short-term debt funds for the time being. Fresh equity exposure would be better through SIPs rather than lump sum,” advised Mrin Agarwal, Financial Educator and Money Mentor, Finsafe.
From an investor’s perspective, there is the fear of the unknown. According to investment managers and experts, at a time where news fis bombarded over the phones and televisions on a minute-to-minute basis, individuals investors tend to take a binary view and jump to polar conclusions.
Shanker suggested, one has to look at events in terms of probable impact and look at all the possible outcomes. For instance, the recent events in the fixed income markets had many investors crying doomsday, with expectations of more defaults. The situation does not look as bleak now and investors have moved on.
“Liquidity will remain the key in 2019, as market will be gripped with volatility. We would see sharp fluctuation in asset prices. In such an environment, investors should prefer assets that offer a high degree of liquidity,” said Naveen Kulkarni, Head of Research, Reliance Securities.
Historically, there have always been periods of relative outperformance for all the asset classes. Hence, chasing returns never pays off. “A portfolio allocation across a combination of debt, equity and other asset classes is the right approach,” said Ankur Maheshwari, CEO, Equirus Wealth Management.
It should be based more on risk profile and financial goals rather than returns especially in terms of one-year or short-term returns, he added.
The election results too, whichever party wins, could be interpreted in various ways and cause the markets to react in the short run. In such an environment, it is advisable to account for the unknown at the start of one’s decision making process instead of shying away from it.
Peter Bernstein, US-based Economic Consultant and Author of worldwide bestseller ‘Against the Gods: The Remarkable Story of Risk’, suggests a basic question before planning any investment– “What if I am wrong?” This is where a simple yet effective tool like asset allocation comes into the picture.
“If one were to compare the performances of different asset classes such as equity, debt, gold and cash over the past 10 years, one would observe that no asset class has been a consistent winner (Refer chart),” said Shanker.
Yet, the allocation of one’s portfolio equally in all the asset classes for the same period would make an average return of approximately 10.9 per cent. Shanker pointed that even in the last 15 years there has been only one instance (2008) wherein the strategy would have given negative returns, that too very marginal. This includes periods of global financial crisis where most of the markets were battered.
“We suggest retail investors to adopt a staggered approach (say spread over next six months) towards increasing their equity exposure. With reference to opportunity pockets, given the risk profile and the steep correction in mid and small cap, investors with a long-term view could also evaluate quality mid and small cap funds as well,” said Maheshwari.
In terms of fixed income opportunity, he recommends investors to go for low duration and ultra-short-term bonds over long duration funds. This strategy will minimise interest rate risk and volatility. Incase investors are not at all comfortable with any intermittent volatility and prefer locking in yields, he recommends investing in fixed maturity plans in a phased manner.
In 2018, markets started with strong momentum, sound macro-economic indicators and expectations of synchronised global growth with optimum domestic earnings. However, 2018 year-to-date (YTD) returns has been largely muted across various asset classes. Maheshwari also points that YTD returns for Sensex for instance is three per cent while broader indices BSE mid and small cap have returns of approx -15 per cent and -25 per cent. Similarly, YTD performance of select CRISIL benchmark indices such as short-term bond fund and long-term debt is 5.8 per cent and 3.5 per cent respectively, despite the recent rally in the bond markets.
Meanwhile, in 2019, Kularni expects equity assets to deliver 12-14 per cent returns, while bonds could record returns of seven to eight per cent. Therefore, he recommends a mix of 60:40 or 50:50 equity and bonds portfolio that could deliver returns in the range of 10 per cent backed by considerable amount of liquidity.
“For pure equity investors, focus should be on large caps companies with quality and clear earnings visibility. We expect earnings visibility to be strong for IT and consumer companies. Large banks could also perform well, provided market liquidity improves,” said Kulkarni. Goyal also suggests another option -- invest in five to six large and mid cap equity funds and earmark this basket to their long-term goals which are at least seven years away. To safeguard these funds from a drastic fall in the mid-term of say three years, one can purchase PUT options which are traded on the NSE. It is an instrument that provides capital protection to your equity portfolio. According to Kotak Securities, PUTs are optional contracts that give you the right to sell the underlying stock or index at a pre-determined price on or before a specified expiry date in the future.One could seek help of professional financial advisor to understand their working and costs in detail.
Goyal suggested that for short-term goals, investors should park their investments in debt funds as they give better tax adjusted returns due to indexation benefit. Another basket can be for emergencies comprising of liquid funds or fixed deposits as they are least volatile.
“This strategy will give you reasonable returns in the long-term. No risk on capital in the mid-term and full liquidity even in the short-term,” said Goyal.
Through this period one must remember that the long-term growth view on India remains strong and the International Monetary Fund forecasts India to remain the fastest growing major economy in the world. As India has approached its inflexion point, we are set to witness exponential growth in the next five to seven years, it stated.
Thus, there is clear merit in diversifying assets across different asset classes as it reduces dependency on a single asset class and protects from market turbulence. This approach is especially applicable heading into 2019, where both domestic and global events may sway market sentiment one way or the other.