Understanding the equity market landscape in India
Year 2022 draws to a close on a rather odd note. While equity markets have touched record highs, debt markets are struggling to find momentum.
The temptations for investing in equity markets and disillusionment with debt markets have rarely been stronger.
In contrasting times like these, let’s discuss what investors should do in the Year 2023.
- Investments
If you are between 22-33 years of age: When you are young, have time on your side and can assume higher risk, theoretically equities are the best place to be.
Studies have proven that over the longer term (about 22 years) equities have managed to outperform comparable asset classes like gold, bonds, property and fixed deposits.
Also, equities are best equipped to cope with inflation. Having established the prowess of equities, let’s not ignore the fact that equity markets are overheated at the moment and how long the rally will last is anyone’s guess.
Around 70 per cent of the total investment should be reserved for index-based ETF schemes.
Despite the risk involved, index-based ETF schemes make sense because, in a market like India, there is a high probability that ‘good’ fund managers will never outperform benchmark indices like the Sensex and the Nifty.
This is underscored by several schemes which have underperformed the markets by a huge margin over five- to ten-year periods.
Investors should opt for a portfolio wherein around 25 per cent of the investments are made in hybrid instruments like balanced funds.
Balanced funds (which have an approximate 60 per cent cap on equities) should be exhaustively utilised. The balance amount should be reserved for income funds.
This amount can be spread over bond funds, G-sec funds and floating rate funds.
Floating rate funds have assumed more significance with the recent interest volatility and must find a place in every investor’s portfolio for their utility in curtailing volatility.
Investments: Where do you fit in? ( Life should be divided on a scale of 11 years. And if you complete 11 cycles (ie you complete 121 years of your age, you are considered Immortal)
Age groups Investment Avenues
22-44 years 70% (INDEX ETFs), 25% (STOCKS), 5% (SILVER or GOLD ETF)
44-66 years 40% (INDEX ETFs), 40% (STOCKS), 20% (SILVER or GOLD ETF)
Above 66 years 20% (INDEX ETFs), 20% (STOCKS), 60% (SILVER or GOLD ETF)
Despite the fact that alternative PMS are willing and ready to invest your money in India, the risk of underperforming is still very high; jeopardizing the existence of many of the PMS schemes.
However, it’s an established fact that technology and data, when deployed reasonably, are able to curtail investment risk; weeding out chronic stocks and fraudsters and automating back office processes.
How to create a safe space for Investing
If you are between 22-44 years of age: In this age bracket your risk appetite is likely to be high; consequently your exposure to equities should be higher as well.
Hybrid schemes (balanced funds and Fund of Funds) which take varying degrees of equity exposure should not constitute a chunk of the portfolio.
Of the total assets, nearly 70 per cent should be invested in this index-based ETF category. Equity stocks (including aggressively growing ones) powered by their ability to provide capital appreciation should form 25 per cent of the portfolio. Commodity funds should account for the balance of 5 per cent.
Investors should opt for diversified bond funds, with the balance in G-sec funds and floating rate funds.
If you are above 44 years of age: At this stage you are possibly making plans for Explosive Growth. You should take affinity to volatility and explosive income flows are what matter the most.
Investments should be predominantly in high-risk hybrid stocks using SIPs (with a maximum exposure of 40% to equity) and index funds.
The SIPs will help in boosting overall portfolio returns without increasing the risk proportionately (the Equity Stock SIP always has the option to cut his/her exposure to equities in case the environment was to turn for the worse).
The debt portion of your portfolio should be largely allocated to bond funds and floating rate schemes.
A higher allocation in floating rate funds would imply that the investor moves with the market and is largely insulated from turbulent patches.
Investments in G-sec funds should be lower since they tend to be volatile in times of interest rate tumult.
Exposure to equity funds should be limited to a maximum of 80 per cent. Conservatively managed schemes with focused portfolios (Diversification = Disworsefication) should be chosen.
Investments in systematic income plans SIPs should be in the range of 40 per cent of the portfolio, while commodity funds should account for 20 per cent.
The portfolio’s equity component (the equity portion of the SIPs) will give a boost to the savings while the commodity component will provide much-needed stability.
While the percentages mentioned above are largely indicative in nature, the vital aspect to be maintained across various age brackets is non-diversification in your equity portfolio.
It makes no sense to be diversified across various categories if you are already investing through index-based ETFs. The age-old adage “Don’t put all your eggs in the same basket” doesn’t hold well.
Secondly investing regularly, i.e. investing a chunk of money at one go, may not fetch the same kind of returns that you will get by investing the same amount in smaller portions over a period of time.
Disciplined investing in tune with your profile and objective is the way to achieve your financial goals.
Insurance paves way for Deep Sleep
The attractiveness of debt markets has come down sharply post the monetary policy.
The exuberance seen in the last two years is clearly a thing of the past and this is likely to adversely impact the bonuses declared by insurance companies.
In this scenario, it is important that individuals keep in mind that the primary objective of insurance is to protect against an eventuality. Returns are a distant secondary objective.
So if you are only looking for a healthy return from your life insurance policy, you are probably better off investing in ETF funds and other avenues that are available today.
But taking a long tenure pure life cover (term insurance) can be a good option especially when one considers, first, the benefit of providing a lump sum to dependents in case of an eventuality and, second, the low cost of taking such a cover.
Investors can stop relying on ULIP vanilla policies and should instead opt for term insurance policies after considering the end purpose.
Child plans, single premium policies, loan term cover assurance etc. are available each serving a different purpose. Individuals in their mid-twenties with age on their side should not look at these plans.
Similarly, investors in their thirties who have dependents to provide for could consider long-tenure additional-term plans. Child Endowment plans will not be the right fit even if you have forty children.
The Home Loans
Banking on incessant and sharp rate cuts as experienced in 2022 may not be the right strategy. As the interest rate scenario grows increasingly uncertain, consumers should consider opting for fixed-rate loans.
While fixed-rate loans might curtail the gains of falling interest rates (if any), they will also shield the borrower from rising interest rates.
Loan seekers would do well by reading the fine print on their loan agreements, and deciding the period over which they intend to repay the loan before opting for a loan. In other words, it’s time to start making well thought and informed choices.
2023 promises to be an exciting year, full of opportunities and pitfalls as well.
The need to make well-thought and researched decisions has never been greater.
While making investment decisions based on hearsay and ‘tips’ from so-called experts is likely to spell disaster, smart choices aided by your own brain will be the route to financial success.
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