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2022 likely to be more challenging for returns in equities, fixed-income investments

Given the prospect of a further pick-up in inflation and recovery gathering momentum, there are chances that the RBI may raise interest rates by hiking the reverse repo in early 2022 followed by an increase in the repo rate thereafter.

December 05, 2021 / 08:19 AM IST

As we enter the last month of 2021, it is a good time to review the year gone by as well as look forward to what we can expect during 2022. While the year began with a drop in the number of COVID-19 cases in India and a gradual opening up of the economy, the second wave from Mid-March was extremely severe and resulted in a second lockdown.

Things have again started improving over the last couple of months with the daily number of cases falling and another gradual unlocking of the economy. Amidst all this, the markets have been remarkably resilient. The Nifty50 Index is up 21.47 percent since the beginning of this year till November 30, 2021. Several new age companies have tapped the capital markets with their IPOs and we have seen record subscriptions in bulk of these issues. There were 16 IPOs in 2020 and the amount mobilised through these issuances was around Rs 26,628 crore. In the first 11 months of 2021, around 54 IPOs have come to the market and the amount mobilised is Rs 1.11 lakh crore!

Equity valuations have become expensive given the run up in the last eighteen months. The rally until now in the markets was broad based and easy money was made across stocks and sectors. This probably will change now and investors will need to be a lot more circumspect with respect to where to invest. Investors should consider the nature of the business, quality of management and valuation while deciding which company to invest into.

Long-term gains will be generated based on the individual company's growth outlook, target market, management quality and financial stability. Investors should stick to their asset allocation and also moderate return expectations from equities in 2022. Investing a portion of the portfolio in international equities from a diversification perspective is also recommended.

Inflation has been benign for most part of 2021 and the central bank has maintained an accommodative stance in terms of monetary policy. Given that returns from bank FDs have fallen in line with interest rates and the low prevailing yields for high quality debt funds, HNI investors have increased investments in direct debt and structured products which offer relatively attractive returns.

Close

Given the prospect of a further pick-up in inflation and recovery gathering momentum, there are chances that the RBI may raise interest rates by hiking the reverse repo in early 2022 followed by an increase in the repo rate thereafter. Due attention will need to be given to fixed-income investment avenues so that there is a minimal mark to market impact on the portfolio while earning a reasonable yield.

Products such as Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvITs) are likely to attract higher investor interest in such an environment. Both REITs and InvITs provide regular income in the form of dividend, interest payments and/or return of capital (amortisation of debt). Investments in long/short funds which follow an absolute return strategy and seek to provide capital appreciation with low volatility may also see increasing participation.

In summary, 2022 is likely to be a much more challenging year as compared to 2021 from both an equities and fixed-income perspective in terms of generating returns from investments.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sameer Kaul is the CEO & MD at TrustPlutus Wealth (India) Pvt Ltd.
first published: Dec 5, 2021 08:19 am

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