Tread carefully

In uncertain times, investors are advised to follow disciplined asset allocation


After the equity markets put up a stupendous performance in 2017, the momentum of which was felt till early January 2018, investors experienced a double whammy of taxation on long term capital gains and dividends, and weakness in global markets. This led to heightened volatility and a short period of negative returns in early 2018.

The year 2017 was not kind to debt investors, who expected lower but predictable and safe returns, and suffered because of rise in interest rates by more than 140bps. It led to some categories of funds giving single-digit returns. Real estate continued to suffer with low demand and weak prices because of the absence of investors after RERA and demonetisation and end-users waiting for further correction in prices.

While equities, SIPs, IPOs and stakes in unlisted companies were the buzzwords for investments of 2017, investors are looking for new themes and ideas for 2018.

Even after the introduction of taxes in equities, for a long-term investor equities continue to enjoy the pole position in the list of options under consideration. Investment in shares of quality businesses, preferably managed by professional managers like MFs and PMSs, will continue to provide 6 to 10 per cent “real growth” after adjusting for taxes and inflation. Some of the star funds and managers of 2017 that invested in average mid- or small-cap companies are already facing headwinds, and the same is expected to continue for the rest of this year.

For fixed income allocation, it is advisable to stay focused on short-term funds and avoid high duration and gilt funds. Inflation is slowly ticking up, government finances will be closely watched in anticipation of elections next year, crude might spike up with global growth coming back on track—all this will lead to upward pressure on rates making duration products unattractive. Arbitrage funds, with better tax structure than debt funds, continue to be the best option, for less than three-year duration fund.

For HNI investors, some options are worth considering for some allocation in portfolios. Two ideas that merit attention are equity-linked debentures offering comfort of capital protection and returns linked to equity market performance, and AIF or hedge funds aiming at strategies around lower standard deviation and debt-plus returns.

The natural tendency to be attracted to investments in home markets due to familiarity is another area that needs to be looked into. Liberalised remittance limit of up to $250,000 every year is mostly left unused. Investors can consider adding geographical and currency diversification to their portfolio
by adding exposure to markets and countries which provide investment opportunities in sectors or companies not available in India.

This year does not appear to be a repeat of 2017's runaway success in equities. Investors interest will be best served by following a disciplined asset allocation, staying away from high returns chases and controlling emotions while witnessing extreme views and headlines in media and business channels. Long-term portfolios should be left untouched, SIPs should be continued and unrealistic promises should be avoided. This should be the year to preserve what has been built and adjust the portfolios back to guidelines and principles that might have been diluted or overlooked in 2017.

Agarwal is managing partner and head, family office, ASK Wealth Advisors.