The Sensex and Nifty are scaling new highs every day, even as their values more than doubled from their March 2020 lows.
Experts say retail investors must take a cautious approach while looking at the equity market for investing now. There are risks investors cannot ignore. Any spread of the COVID-19 in India may lead to restrictions on movement and economic activities, which can slow down the economy and earnings growth. A large segment of Indian population is yet to get vaccinated. Rising inflation and a possible hike in interest rates won’t be good for stock markets.
But what about other asset classes – debt, gold and international funds?
Equity: Take a cautious approach
Though equity funds have rewarded most investors, making money seems to be a tough task from now on. Experts advise investors to be measured with their investments in equities and also while reaping benefits of the surge in the markets.
Deepak Jasani, Head-Research, HDFC securities advises existing investors to evaluate the weightage of equity funds in their portfolio. “If the weightage overshoots their planned levels, then they should bring it down. SIP investors need to evaluate their CAGR returns. If their CAGR is more than 16-18 percent over a three-plus years’ horizon, then they must think about booking or stopping those SIPs.”
For people who don't have enough exposure in equity funds, anytime is a good time to start, in his opinion. “Flexi-cap, multi-cap and focused funds are preferred bets for long term investors,” he adds.
Debt funds: Lower returns expected
Debt fund categories as a whole have disappointed investors over the last one year. Decreasing yields due to excess liquidity and RBI’s measures to boost the economy resulted in lower returns from debt funds. Spread compression and some corporate bond downgrades too impacted debt funds negatively.
Dwijendra Srivastava, Chief Investment Officer-Debt, Sundaram Mutual Fund, says, “If you look at the significant part of the curve, where the duration risk is low, the returns are not positive real returns. The inflation is rolling over 6 percent right now and the average inflation for the entire year is expected to be around 5-5.5 percent. It is difficult to generate positive real return even if you buy good quality corporate bonds, where their yields are over 5.3 percent (with four-year residual maturity). On the other side, the rates on savings accounts in most banks are around 3 percent and in FDs, 4-5 percent. Returns are suboptimal from debt now.”
“Till the time we get some clarity on how RBI wants to manage interest rates, it is better to stay away from long duration funds,” Srivastava advises. Currently, fixed income investors can consider high-quality short-term funds with 1-3 years duration. For getting better return on assets, you may look at the asset allocation funds like balanced advantage funds which allocate money to stocks and bonds depending on their relative valuation and attractiveness, he adds.
Gold: Limit your expectation
Gold’s safe-haven status makes it a preferred choice during market and economic meltdowns. For instance, gold delivered healthy returns when the equity market registered steep falls in 2008, 2011, 2016 and 2020. However, gold lost its favour in the recent period as many investors were attracted towards cryptocurrencies says Jasani of HDFC securities.
Chirag Mehta, Sr. Fund Manager, Alternative Investments, Quantum Mutual Fund says, “Investors sometimes get carried away by one asset class that is doing well and forget the purpose and usefulness of other asset classes within the portfolio. When equity markets were doing well, other investments fell out of favour. Where risk assets continue to move, gold may remain range bound despite good fundamentals.”
“We see some risks because there are numerous uncertainties and risks on the horizon. We don't know what will trigger and when. But whenever it does, it will bring investors back into gold. So we think investors should use this opportunity wherein the gold remains attractive relatively in valuation standpoint,” Mehta adds.
Given its low correlation with equity and other assets, gold can be a good portfolio diversifier too. It can account for 5-10 per cent of your portfolio at any point of time. Sovereign gold bonds (SGB) and Gold ETFs are preferred gold investment products.
International investing: Gaining popularity
Over the past few years, select global markets including the US performed fairly well and rewarded Indian investors handsomely. But Niranjan Avasthi, head-products, Edelweiss MF sounds a word of caution, “US markets are not cheap now; if you look at the S&P 500 index, it is trading at close to 21 times its forward earnings over its long-term average, which is close to 15 times.”
Avasthi believes three segments of international markets will do well. One, while growth stocks in the US have fared well and become expensive, value stocks have not performed so well so far.
Two, China and Greater China regions look very good. China is the only market that is reasonably valued currently. China is transforming itself from a manufacturing economy to a very home-grown domestic consumption-led economy and also getting itself self-sufficient in terms of technological advancements.
Avasthi cautions about the volatility as we know how China operates in terms of its political environment.
Three, US technology funds. “If you look at the underlying earnings growth, this is the only sector which has been growing in last few years, and may continue to grow strong over the next few years. There is no cyclicality in their earnings” adds Avasthi. There are five such funds allocate majorly to US technology sectors including Edelweiss US Technology Equity FOF, Motilal Oswal Nasdaq 100 ETF and Mirae Asset NYSE FANG+ETF FoF. They give you exposure to businesses that are not available in domestic markets.