Indian markets have been buoyant since April 2020 and are among the top performing indices in the globe.
By Reshma Banda
Indian markets have been buoyant since April 2020 and are among the top performing indices in the globe. The prevailing pandemic has contributed to an increase in volatility with numerous lockdowns hampering economic activity. Steep rise in inflation supported by a rise in commodity prices has contributed to an increase in interest rates across geographies. With world markets trading close to the all-time highs across this macroeconomic background, we would tend to be a little vigilant as a correction over the short term cannot be ruled out.
Volatility is an inherent characteristic of the capital market which can be denoted as one of the “Risk” factors. Investing in a single asset class would be categorized as a relatively ‘high risk’ portfolio and would need to be mapped with the risk appetite, age, goals etc. of the policyholder/investor. From a personal finance perspective, having a diversified investment portfolio across asset classes for an individual would provide stability and balance in the entire corpus. Hence, while investing in 2022, investors may strategically diversify their investments as per their individual risk profile and investment objectives. One’s portfolio should be able to fulfill their future capital and income requirement while also providing liquidity in the case of an emergency. Let us understand the key aspects while making asset allocations decisions for the portfolio.
The importance of asset allocation in managing your portfolio
Different asset classes provide varying returns over different time periods. As depicted in the below table, equity as an asset class outperformed the rest of the asset classes over the years. Similarly, Debt, Gold and Cash outperformed other asset classes in different years. Hence, it would be prudent to have a mix of different asset classes in your portfolio. Asset allocation should be reviewed from time to time, and this particularly becomes important during periods of uncertainty. Investors can choose their asset allocation mix based on their risk appetite and investment horizon. We also recommend that investors can use a goal-based approach towards asset allocation.
Calendar Year-Wise Performance of Different Asset Classes (in %)
Source – Bloomberg. Asset Classes represented by the following indices: Debt (Crisil Composite Bond Index), Cash (Crisil Liquid Fund Index), Large-Cap Equity (Nifty 50 Index), Mid-Cap Equity (Nifty Midcap 50 Index), Gold (MCX, Spot Gold Index). CY returns are absolute. Past performance may not be an indicator of future performance
Invest systematically, as market timing is difficult. Patience is the key in creating wealth
Investing systematically in equities helps in rupee-cost averaging i.e. averages out the cost of your investments, and hence lessens the results of short-term market fluctuation on your investments. In-fact in a falling market SIP (systematic investment plan) will help in acquiring more units for the investor. Overall, SIP helps in taking out the guess-work in investing, as market timing can be difficult—even for a seasoned investor. However, the key-word here is ‘patience’, which is required in creating wealth.
Longer the investment horizon – lower the chances of making negative returns in equities
Famed investor Warren Buffet had once said— “The stock market is a device for transferring money from the impatient to the patient”. Therefore, by investing for the short term, the investor can experience intermittent market volatility/losses. However, the long term (patient) investor is rewarded, and historical data also suggests that the chances of making negative returns in equities, for a longer holding period (above 5 years), significantly reduces.
Health & Life Insurance is a must
The last year has taught us the importance of insurance as an investment. Health insurance not only protects out-of-pocket payments in the case of a medical emergency but also keeps funds from drying up whereas a pure life insurance plan offers adequate coverage at a low cost and allows the family to remain financially viable in case of the earning member’s demise. Investors may consider a guaranteed income plan which offers assured income payouts for a predetermined period of time with life cover, suitable for all risk profiles. It is a stable and convenient way to earn regular income with the tax exemption under section 10(10D) of the Income Tax Act, 1961, subject to conditions stated therein.
Summary
The bottom line approach is to meaningfully diversify your portfolio in various available investment avenues and not just follow the lucrative returns of any distinct asset class. Each asset class has its own attributes and appropriate allocation can maximize the overall portfolio’s Risk Adjusted Returns over the long run. It is advisable to consult with your financial advisor before investing, it will not only help you in creating a portfolio based on your needs and risk taking ability but also enable you to choose the right option for your investment.
(Reshma Banda, Head–Equity & Executive Vice President, Investments, Bajaj Allianz Life. Views expressed are the author’s own.)