Where should you invest in 2021?

As 2020 winds to a close, there are mild reasons to cheer. Despite being volatile, equities have had a spectacular run over the past 7-8 months. Falling interest rates and bond yields made liquid funds and small saving instruments less attractive. And after a strong rally in the first seven months, gold prices have fallen. The US stock indices continued to rise, though most experts said that valuations were stretched. So, how is investing going to change in 2021 and what are the factors you should watch out for?

Stagger investments in equities

Equity markets are overvalued. In December, the S&P BSE Sensex crossed 46,000 points, and continues to record fresh highs. The Nifty 50 index has gained 10 percent since the beginning of the year.

Abundant liquidity is causing the rise of equity markets worldwide. The prospects of a COVID-19 vaccine too have brought cheer and raised the possibilities of better economic growth. The price to earnings ratio of the Nifty 50 index stood at 36.8 times, up from 28.3 at the start of the year.

But that doesn’t mean you should stop investing in equities altogether. You can never time the market. Therefore, invest in a staggered manner. “Equity valuations are reasonable, but some sectors are quoting above their historical average,” says Nimesh Chandan, Head-Investments, Equities, Canara Robeco Mutual Fund. “Investors have to be patient and must take a longer timeframe while investing in stocks, especially at this stage,” he adds.

However, earnings of companies haven’t yet improved much; something that analysts will eagerly watch. Any negative surprises here can lead to corrections.

Keep your return expectations in check. “In a low interest rate environment, return expectations from all asset classes need to be moderated. Investors should expect around 10 percent returns from large cap equity mutual funds and exchange traded funds (in the year of 2021),” says Nitin Rao, CEO, InCred Wealth.

Ensure diversification across large, mid and small-cap funds. Avoid thematic funds if you wish to limit your risks or if you do not understand the theme well enough to make timely entries and exits.

Diversify in overseas stocks

If you haven’t yet invested overseas, consider international mutual funds available through domestic houses. However, not all international equity funds are the same. You must choose carefully. Stick to diversified funds; it is better to avoid themes in this category as well.

Though US-focused funds have done well in the last few years, don’t just go by past returns. Keep some allocation to the US. But consider other geographies as well. “Though themes such as global tech stocks may continue to do well, investors are better off investing in well diversified global allocation funds over US-focused equity funds while investing overseas,” adds Rao.

Allocate around 10 percent of your assets in global funds.

Bonds – time to stay light

Debt funds that invested in good quality bonds (corporate bond funds-9.66 percent return; and banking & PSU bond funds-9.59 percent return as per Value Research) delivered well this year.

Here again, don’t chase past returns, as bond yields fell in 2020. Experts say that yields may rise in 2021. When interest rates rise, bond prices- and the net asset values of debt funds that invest in them- fall. “We do not expect any change in interest rate cycle in the first half of calendar year 2021. However, in the second half there is a possibility that RBI may gradually start removing excess liquidity and even raise policy rates,” says R Sivakumar, Head-Fixed Income, Axis Mutual Fund. “Stick to bond funds with up to two years’ duration,” he adds.

Investors should match their investment timeframe with the duration of the bond fund. Low duration, corporate and Banking & PSU debt funds can be attractive investment options. Joydeep Sen, corporate trainer and author says, “You can also consider investing in roll down strategies of bond funds investing in good quality bonds. If you are taxed at low rates and can forego liquidity, then you can also allocate some money to small saving schemes as the rates are attractive.” If you are taxed at higher rates and can hold your investment till maturity, then consider tax free bonds.

Gold: The shine may not return very soon

Gold prices have risen 26.73 percent in 2020. But the news of vaccine arrival has tripped gold’s run. Still, gold can be a part of your portfolio, experts say. Economic recovery the world over will pick up over time. Low interest rates are expected to continue, as governments continue to borrow. “A weaker dollar and high liquidity could result in higher commodity prices as well and therefore could be inflationary,” says Chirag Mehta, senior fund manager – alternative investments, Quantum Mutual Fund. If bond yields remain subdued, gold will continue to do well in 2021.

You should consider gold for diversification/hedging against inflation, and not from the point of generating high returns. You can allocate up to 10 percent of your portfolio to gold exchange traded funds, gold saving funds or sovereign gold bonds, or a mix thereof. If haven’t started investing in gold, the recent consolidation in prices can be a good starting point.

Buy gold when prices fall intermittently. Navneet Damani, VP- Commodities Research, Motilal Oswal Financial Services sees gold prices moving to Rs 65,000-68,000 next year.

Invest across assets, but maintain a balance

In 2021, do not get swayed by past returns. Over-investing in one asset and under-investing in another based on past returns will prove disastrous.

Instead, rebalance your asset allocation from time to time. Ignore the market noise. A second wave of COVID-19 and possible lockdowns can cause some market panic, but use such declines to invest smartly.