K.P. Venkataramkrishnan
INDIA’S ECONOMIC growth has slowed down in the past few years. In the July-September quarter, it was 4.5 per cent, the lowest in six years. Accordingly, the National Statistics Office has reduced its growth forecast for the year 2019-20, from 6.1 per cent to 5 per cent.
How do you reposition yourself as an investor in such a situation, as such shifts in economic performance could alter the market returns, which could distort your calculations on financial goals? Historical data suggest that economic slowdown is accompanied by lower returns from equity investments. For instance, the year 2008, which witnessed the global financial crisis, saw equity returns dropping to (-) 51 per cent. At the same time, such phases could mean better returns in some other asset classes. In 2008, for instance, debt investments gave a return of 28 per cent.
That gives us some direction on re-strategising in the time of slow economic growth.
Rebalance your asset allocation
In situations like the current one, you might have to change your course of action to achieve your medium- and long-term goals. While reliance on equity can be continued for the long-term goals, the medium-term ones could come under strain if those are dependent on high returns from equity investments. Accordingly, you might need to increase investments for the long-term goals and change course for the medium-term goals.
For the medium-term goals, you would need to dedicate a higher portion of your investments to debt. This reduces the volatility that comes along with equity investments and adds a layer of safety to your medium-term goals. How can that be done?
Medium duration funds
You can explore medium duration funds, commonly known as medium term bond funds, for your medium-term goals. As per the mutual fund scheme categorisation by the Securities and Exchange Board of India, medium duration funds can invest only in debt securities of a duration of 3-4 years. These funds can invest in debt securities as well as money market instruments.
How do you choose a good and reliable medium duration fund?
Before choosing a debt fund, check not just the past returns, but also the composition of the portfolio. Try to understand if the scheme has excessive exposure to a single entity or a group of entities controlled by a single company, or a single sector. This is an important filter that you must apply, especially considering that some debt exposure went bad in the past few years.
The next thing is the rating of the securities that the scheme invests in. Ideally, a big chunk of the investments should go to AAA-rated securities. This is the highest level of credit rating, which signifies lowest probability of default on repayments.
But the credit ratings are given by rating agencies. So, it is important to check if the fund house applies some more filters and analyses the bond-issuing companies in-house before making the investments. All of these details are publicly available through the fact sheets that fund houses publish.
Based on these parameters, you can consider the ICICI Prudential Medium Term Bond Fund. The scheme has an average exposure of just 1.8 per cent to 54 different securities. Moreover, 39 per cent of the scheme’s assets under management are invested in AAA-rated instruments as of January 2020, giving it an adequate exposure to the highest quality of debt papers in the market. Between July 2013 and February 2014, the average one-year return from the scheme stood at 12 per cent, and between June 2015 and October 2016 at 9.6 per cent. If you have not yet recalibrated your investments with respect to the changing economic environment, this scheme can be a good choice for you to refocus on your medium-term goals.
Venkataramkrishnan is of Viruksham Financial Services.