Money matters

The thumb rule of investment—do not put all eggs in one basket


Indians had typically been averse to investing in equity and equity-linked instruments, instead preferring fixed deposits, property and gold. That, however, is changing. More and more Indians are buying stocks or channelling funds through systematic investment plans of mutual funds, although the percentage of the participating population is still quite low in comparison with some developed economies.

Since the NDA government came to power on May 26, 2014, the Sensex, the BSE benchmark, has jumped 46 per cent. In the year after demonetisation in 2016, the Sensex jumped 28 per cent. Bank interest rates have been falling ever since and the real estate market has not yet recovered from the shock of demonetisation. These things together led to massive flows into the equity markets.

The total assets managed by mutual funds have more than doubled, from Rs10.11 trillion in May 2014 to Rs22.86 trillion in December 2018. In May 2014, equity, balanced funds and equity-linked savings schemes (ELSS) together managed Rs2.31 trillion. In December 2018, it stood at Rs9.66 trillion, a four-fold jump.

Data from the Association of Mutual Funds of India shows that the share of equity-oriented schemes increased to 41.9 per cent of the industry assets in December 2018, from 40.3 per cent a year earlier. Individual investors held Rs12.91 trillion in mutual funds in December 2018. They now hold a higher share of industry assets at 53.6 per cent, 3 per cent up from a year earlier.

However, as mutual fund investments are market-linked, buying pure stocks or equity funds may not always give you good returns. Over the last one year, for instance, the market has been extremely volatile. It is currently down more than 7 per cent, since the high of 38,989.65 it hit on August 29, 2018. Small- and mid-cap stocks have seen a double-digit correction.

That has weighed on returns of equity mutual funds, which have ranged from a gain of around 5 per cent to a loss of 20 per cent. Most analysts do not expect the volatility to subside in 2019, at least not in the first half, as elections are round the corner, oil prices remain volatile and global trade tensions linger on. Corporate earnings, though looking up of late, are still not at their best. Expectations are still being moderated, even as the macro environment remains favourable. “Valuations remain a key issue dodging the market and fears of an adverse election outcome persist,” said Sunil Sharma, chief investment officer of Sanctum Wealth Management. “Cautious optimism remains our preferred path forward, which translates to strategies, managers and portfolios that minimise losses, while ensuring participation in gains.”

So, is it time to pare down the exposure to equity and switch to debt funds or traditional bank deposits?

Experts say one should never be worried about short-term uncertainties if the saving is for a long term. “One mistake that people often make is to look at the market as a get-rich-quick scheme. As an investor, bear in mind that equity investments are long-term investments. Focus on identifying a few strong companies for investing a part of your investment. Once you invest, have patience to ride through the ups and downs of the stock markets for the long term,” said Adhil Shetty, CEO of BankBazaar.

It is critical that one consider future goals, like saving up for a child’s higher education or retirement planning, or even foreign holidays, when making investments. One must not get swayed by near-term uncertainties. “More than timing the market, it is important to spend time in the market,” said financial planner Anant Ladha, founder of Invest Aaj for Kal. “Usually, in times like this, when keeping patience is difficult, it is very critical to manage emotions. I feel, now it is not the time to move out of the market. Rather, it is time to have patience and keep our goals in mind.”

Ladha expects at least one more correction in markets this year, and he recommends SIPs with a horizon of five years or more. “SIPs perform well, especially in fluctuating markets. But, one needs to have that five-year patience. For lump sum investment, selection becomes critical. We should stick to blue-chip, multi-cap or value-based funds,” he said.

And, an investor’s risk-return objective and the investment time horizon should drive her asset allocation. “If you are currently under-allocated in equities as per your risk profile, now would be a good time to start topping up allocations in equity funds. Investors should clearly focus on the long-term by cutting out short-term noise,” said Kaustubh Belapurkar, director, fund research at Morningstar.

Selection of right stocks is extremely crucial in uncertain times. “Mid- and small-cap funds are great wealth creators over the long term, but come with additional volatility as was witnessed in 2018. If your portfolio is under-allocated to small- and mid-cap funds as per your risk profile, there is a need to systematically start increasing exposure to this segment. But, the investment time horizon is crucial, as anything less than seven years in these funds could be counterproductive,” said Belapurkar.

Most analysts are of the opinion that large-cap stocks or funds investing predominantly in large-cap stocks should form the core holding in one’s investment portfolio. In recent years, a few asset management companies have even reduced their minimum lump sum investment requirement from Rs500 a month to just Rs100. This has helped even the people in the low-income category to put some money in mutual funds.

This is the time of the year when many people start hunting for last-minute tax planning options. ELSS funds are a good option for those who seek higher equity returns as well as tax benefits. This is a category of diversified long-term equity fund, where the investment is deductible under Section 80C. However, one must remember that investments in ELSS funds are locked-in for three years. Over a ten-year time horizon, most funds in this category have delivered returns ranging from 14 per cent to 20 per cent.

The government has taken many steps to make the National Pension Scheme more attractive. The withdrawals have now been made tax-free. Earlier, only the investments made each year were exempted. In a country where there is no social security offered or most private sector employees are without pension, NPS is a good option for saving for retirement.

In NPS, investments are mandatorily channelled to a mix of equity, government securities and corporate bonds, reducing the risk that is generally linked to equity. There is an income tax benefit for individual subscriptions of up to Rs50,000 under Section 80CCD1(B), which is over and above the Rs 1,50,000 deductions that are allowed under Section 80C. Another advantage of NPS is that the fund management charge is as low as 0.01 per cent of assets under management a year for the private sector and 0.0102 per cent of AUM a year for government employees.

However, remember that most of the funds are locked-in till you retire. Last year, there were some relaxations, but still only partial withdrawal (up to 25 per cent) is allowed. Also, equity investments remain capped at a maximum 75 per cent, and that also starts coming down after the age of 35. Another catch is, 40 per cent of the amount withdrawn post retirement would have to be put into an annuity plan, which will be taxed accordingly.

Despite the additional tax benefits, for the reason that equity investments are capped in NPS, some financial advisers recommend ELSS over NPS. “ELSS will continue to have an edge over NPS,” said Ladha. “First, lower lock-in period of three years. Historic average returns of ELSS have been more than 15 per cent compounded annual growth rate, and keeping India’s GDP and inflation in mind in future, too, at least 12 per cent returns can be expected.”

Conservative investors typically have little exposure to equity markets. Last year, when equity markets were volatile, many banks raised interest rates on the back of repo rate hikes by the Reserve Bank of India. In November 2018, State Bank of India, the country’s largest lender, raised term deposit rates to 6.80 per cent from 6.70 per cent for one year to less than two years. Interest rate for two years to less than three years was hiked to 6.80 per cent from 6.75 per cent. In the case of private sector lender HDFC Bank, interest rates currently range between 6.25 per cent for up to six months to 7.40 per cent for deposits for up to three years.

However, interest rates are unlikely to go up from here.

The 10-year benchmark yield on government securities (G-Sec) has fallen to around 7.30 per cent, from around 8.18 per cent earlier. With inflation trending below the band set by the RBI and low food inflation, it is expected that the Central bank will cut interest rates soon. Typically, interest rates and prices have an inverse proportion. When yields fall, the net asset value (NAV) of the scheme goes up. So, one could consider investing in debt funds.

“Foreign portfolio investors have turned positive on India’s fixed income market in the past two months with a net buying of $1.5 billion since November,” said Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management. “We believe there is a selective buying opportunity in the high quality corporate bond market as spreads have widened and yields have nicely priced risks.”

Investors who have a time horizon of less than four years should strictly stay away from equity at current valuations and look at debt instruments like liquid funds or short-term funds, said Ladha.

Liquid funds invest in short-term money market instruments such as government treasury bills, money markets, short-term corporate deposits and commercial papers. This makes them very liquid, and there is no exit load. A few fund houses also have liquid funds with instant withdrawal facility. People who usually maintain a large balance in bank deposits to meet sudden emergencies could look at this alternative.

“Most people maintain contingency fund in a savings bank account or a fixed deposit. They are easily accessible and can be liquidated when needed. However, keeping this money in a liquid fund will provide you higher returns than a savings account,” said Shetty.

As such, the interest rates offered by banks on deposits are less than what is offered by the Public Provident Fund. In the recent review, interest rate on PPF was left unchanged at 8 per cent. Traditionally, PPF has been seen as a tool to build a retirement corpus. The account matures after 15 years, which can be then renewed for five years at a time. But, experts point out that one would have to stay invested for a long period to build a sizeable corpus. A monthly investment of Rs10,000 for 30 years can help build a corpus of Rs14.6 million, at the end of the period. However, if the period is reduced by half, the returns will come down to a fourth, that is just Rs3.5 million.

Another option is the Sukanya Samriddhi Yojana (SSY), which has been floated with the goal of ensuring the welfare of girl children. A Sukanya Samriddhi account can be opened in a scheduled commercial bank or a post office by parents in the name of a girl child up to the age of ten. Like PPF, interest rates on this scheme are revised every quarter. Currently it is 8.5 per cent.

The rules for SSY were amended last year, lowering the minimum amount required to open an account to just Rs250, from Rs1,000 earlier. Deposits can be made into the account for 15 years and the account as such matures after 21 years. Contribution to SSY also qualifies for income tax deduction under 80C. But, one must remember that partial withdrawals here are only allowed after the account holder turns 18.

Another time-tested instrument is the National Savings Certificate (NSC). Just like the PPF, you will earn an interest of 8 per cent on NSC and it is more efficient than bank fixed deposits, considering that the interest earned is deductible under Section 80C.

The best option for senior citizens to earn a regular risk-free income post retirement is the Senior Citizen Savings Scheme. The interest rate that is being offered is 8.7 per cent, which is subject to review from time to time. This scheme is for people above 60 years and the account matures after five years, with an option to extend it for three years.

The real estate sector, which was rocked by demonetisation, has been showing some signs of a recovery. According to real estate consultancy Knight Frank, 2018 was the first time in this decade when annual numbers grew year-on-year. The total units launched last year in eight cities jumped 75 per cent to 1,82,207, and 60 per cent of the new launches were priced under Rs5 million, targetting the affordable and mid-range housing segments.

Sales also showed signs of uptick. In Bengaluru, sales were up 27 per cent. Elsewhere, the growth was more modest—Mumbai, Ahmedabad and Chennai seeing a 3 per cent growth, and sales in the national capital region and Hyderabad rising 8 per cent and 9 per cent, respectively. So, is it a good time to buy a house?

“This is, without doubt, a very favourable market for homebuyers looking to purchase properties for their own use,” Anuj Puri, chairman of Anarock Property Consultants. “One of the obvious reasons is the abundance of options in all categories of housing. Also, property rates have reduced considerably across cities.”

One thing to remember is that an under-construction property will attract a GST, so your net price will go up. Only those properties that have a completion certificate will now be eligible for exemption from GST.

If you are looking to just invest in residential real estate, a lot of due diligence will need to be done as market dynamics have changed in the last few years. “Capital appreciation is a reasonable expectation only in some categories, and in certain high-demand/low-supply areas. With some exceptions, luxury housing is currently not the best play. The preferred categories for investors currently are lower budget and mid-segment housing,” said Puri.

Though Indians traditionally invested heavily in gold, as returns fell over the past few years, the interest also diminished. 2018, however, turned out to be a surprise. Between January 26, 2018, and January 26, 2019, gold prices went up close to 7 per cent.

When equity markets are volatile, people tend to look at gold as a safe investment. Global gold prices topped $1,280 an ounce in the backdrop of falling equities towards the end of 2018, and some indications are that if the volatility continues into 2019, gold may continue to glitter.“We expect increased market uncertainty and the expansion of protectionist economic policies to make gold increasingly attractive as a hedge. While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Federal Reserve has signalled a more neutral stance. Structural economic reforms in key gold markets will continue to support demand for gold in jewellery, technology and as means of savings,” the World Gold Council said recently.

Ultimately, where you invest will depend on your risk appetite, time horizon and preferences. The thumb rule is, do not put all eggs in one basket. Always diversify your investments across asset classes. So, if equity does not give you returns one year, other asset classes may provide you a cushion. Also, do remember to stick to your goals.