From bonds to equities to real estate, take a look at how your investments fared in 2020

The COVID-19 pandemic may have taken a toll on the health of many. But the silver lining for the year was our portfolio’s performance. Key asset classes such as stocks, gold and bonds gave healthy returns. Though the performance numbers look good, investors will be better off understanding the reasons and realigning their portfolios accordingly.

Equity

The slump in March 2020 now appears to be a minor speed breaker. From the low of 10,710 as on March 23, 2020, the Nifty 50 Total Returns Index (TRI) gained 85 percent till December 31, 2020. “Abundant liquidity and low interest rates lifted stocks in 2020 despite the fall in corporate profitability,” says Jignesh Shah, Founder of Mumbai based Capital Advisors.

Unlike the polarized stock market of CY2018 and CY2019 – when only a few stocks determined the rally – CY2020 saw many stocks across sectors participating on the way up. This resulted in mid and small-cap focused funds outperforming large-cap schemes.

What does 2021 hold? At a price to earnings ratio of 39 for the Nifty 50, the stocks are not cheap anymore. So, investors should check if the corporate earnings grow in line with expectations – which are stretched. Don’t go overboard with equities. Stagger your investments. “An uptick of similar magnitude in stocks is highly unlikely to recur in 2021,” says Nirav Karkera, Head- Research, Fisdom. “Corporate profits have soared in the last quarter, but expectations need to be moderated for the next couple of quarters which may have a bearing on valuations,” he adds.

Fixed income

Interest rates fell throughout last year, in response to government cutting interest rates to fight the Covid19 pandemic. But this impacted different debt instruments in several ways.

Interest rates on bank fixed deposits and small-saving instruments fell. This hurt fresh investments made in them. The one-year State Bank of India FD rate fell to 4.9 percent towards the end of the year, from 6.25 percent at the beginning.

But falling rates helped debt funds give good returns. Joydeep Sen, corporate trainer (debt markets) expects rate of interest to remain stable in CY2021. “Investors have to moderate their expectations of returns from bond funds in 2021. Low yield-to-maturity now compared to the level at the beginning of the CY2020, caps expected returns in 2021,” he adds.

Since the economy is yet to recover fully, investors should stick to debt funds investing in good quality bonds. Corporate bond, banking & PSU debt, in and short duration funds are good options.

Gold

Low interest rates, infusion of liquidity on a large scale and rising government deficits were a perfect combination for gold prices to rise. Safe-haven demand in the uncertain times – first half of the CY2020 – further pushed up gold prices. In the second half of 2020, gold prices rose only 2.8 percent. One should not write off the asset class just because the covid19 vaccine is here and economy is recovering. “Gold should be used as a means of portfolio diversification and exposure should be limited to 10 percent,” says Sen.

International Equities

Investors looking for diversification had been investing in global mutual fund schemes. These funds invest in stocks of companies listed overseas, and for the last few years have done quite well – especially those focused on the US. CY2020 was no exception. Though investments in developed market indices such as the Nasdaq 100 have outperformed most domestic equity funds by a wide margin, investors should avoid going overboard. Karkera advises against selecting international funds for investment purposes on the basis of just their recent performance. “International investing should be viewed from a strategic standpoint of capital allocation, risk mitigation and aligned investment objectives,” he says.

Investors should build diversified portfolios depending on their financial goals and their risk appetite.