By R Venkataraman
As we method the finish of a somewhat challenging year, the popular query operating in investors thoughts is exactly where to invest in 2021. I have usually insisted that it is your economic ambitions, investment objectives and threat profile that are essential components for creating an investment choice and arriving at your strategic asset allocation. Here is my outlook for the 3 popular asset classes for 2021.
Debt investments: In CY2020, RBI lowered the repo price by 115 bps to 4%. As interest prices fall, bond costs rise and so debt mutual fund investments across the spectrum benefited. Long-dated bonds like gilt, extended duration and dynamic bond funds delivered on an typical 15% returns, even medium to quick term bond funds, corporate and banking PSU debt funds, delivered double-digit returns.
Having the identical expectations for CY2021, having said that, could lead to disappointment. This is mainly because interest price cycle has seemed to bottomed out and scope for additional price cuts is significantly less mainly because of increasing inflation and greater government borrowing. In such a situation it tends to make sense to progressively book earnings from mutual funds holding extended-dated bonds like gilt and extended duration funds.
Though interest prices could not fall additional, they are not anticipated to rise any time quickly either. Investors could appear at corporate FDs and secondary marketplace bonds for chasing slightly greater returns (at the moment 6% to 7% p.a for AAA-rated FDs & bonds). However, such investors also need to have to contemplate the credit threat involved and need to not go overboard. 7.15% RBI bond is a further investment providing related returns. Regular earnings instruments like Senior Citizen Saving Schemes, Post Office MIS at the moment presents 7.4% p.a & 6.6% p.a taxable interest respectively.
However, it is Sukanya Samriddhi Scheme, PPF & for employed – EPF providing tax-totally free returns of 7.6%, 7.1% & 8.5% that would score greater than most of above investments on parameters of security, returns & tax efficiency, but the catch right here is liquidity. For more liquid element of the debt portfolio, contemplate ultra-quick-term and low duration mutual funds.
Equity Investments: Since March lows, Indian indices are up by about 80%, driven by liquidity and low-interest prices. Liquidity, on account of enormous fiscal stimulus by governments all more than the globe and monetary stimulus by worldwide central banks has discovered its way to emerging markets. After initial gains in the indices led by security sectors such as IT, Pharma and to some extent chemical compounds, telecom and FMCG and huge-cap good quality names such as reliance, now economy-connected sectors have began participating in the rally as a vaccine is just about the corner and anticipated financial recovery. Banks the largest beneficiaries of financial recovery, customer discretionary, cyclicals, industrials and power will do effectively. This trend is anticipated to continue in CY 2021 exactly where you could see profit booking in defensives and dollars moving towards more economy-connected themes.
Overall sectoral rotation that we have observed so far will continue into CY2021. In such a situation multicap or flexi cap mutual funds that have the flexibility to invest across marketplace cap & sectors can be great alternative for retail investors to take exposure to equity as rally gets more broad-primarily based.
Value investing is a further theme which would play out in the starting of the coming year. Interest Is currently observed in PSU space in this regard and couple of huge AMCs have also raised dollars via NFOs of worth funds to ride this theme.
Small and Mid-caps could quite effectively make a comeback in CY 2021 as is also evident from their current outperformance. They have severely underperformed huge-cap indices due to the fact 2017, as the economy was in a mess even just before pandemic & investors have been staying away from them. Beaten down good quality little caps offered at great valuation compared to huge caps sets up the stage for their comeback in CY 2021.
Gold Investments: As a normal asset allocation, 10% to 12% of the portfolio is generally kept in gold as a hedge against riskier investments. Sovereign Gold bonds give 2.5% returns more than and above gold price tag appreciation at the identical time extended term capital gains is exempt on maturity and therefore is finest way to take exposure to gold compared to any other physical, electronic or paper mode of holding gold.
Gold can provide a hedge, debt can provide security, stability and liquidity. With equity, retail investors need to comply with the mutual fund SIP route or invest in direct equity only with advise from certified specialist advisors.
(R Venkataraman is the Managing Director, IIFL Securities Ltd. The views expressed are the author’s personal. Please seek advice from your investment advisor just before investing.)