India was already slowing down before the pandemic hit in March. Post the pandemic there is even slower growth, impact on employment and hence discretionary spend and further consolidation especially in key sectors like financial services.
The pandemic is likely to lead to severe economic contraction all across the globe. Governments and central banks have provided unprecedented fiscal and monetary support and this has led to record low interest rates including negative interest rates in many developed markets. Given this backdrop, how should investors position their portfolio?
Fixed income as an asset class has seen unusual turmoil since September 2018 and this has led to frozen liquidity except for in instruments issued by the best credits. Given the recent move by a mutual fund to shutter a few of their funds, investors are wary of investing outside of AAA rated credits and banking and public sector bonds.
Investors desirous of investing into such credits can either invest into a banking/PSU mutual fund or buy into the exchange traded fund which has public sector undertakings as the underlying. Unlike equities, in fixed income, investors get a tax advantage to use the mutual fund legal vehicle since the investment, if held for a minimum period of three years, is eligible for long term capital gains treatment
If one runs a screen on the 6000 plus listed companies in India and filters them basis profitability, growth, return on capital and quality of governance, the list might shrink to about 100 investable companies in India. While investors have been investing into equities through mutual funds since 1995, the mutual fund legal vehicle has become fairly retail in its orientation and this has led to investor interest in alternative vehicles like portfolio management schemes and alternative investment funds.
UHNI investors and investors who can commit large sums of money into equities should think about creating a concentrated portfolio either through a good manager or using a financial advisor. This portfolio can be created from the short list of the 100 companies and the pricing should be client centric and not usurious.
Given all the money printing that is going on, at some point, inflation is bound to surface though the likelihood in the near term seems remote. Gold has been traditionally a good hedge against inflation and it is recommended that investors keep a certain allocation in their portfolio around this asset class. Access to gold can be through a gold exchange traded fund or also by buying the stocks of gold loan companies that tend to do well when gold prices are rising.
One must always think of buying protection as far as their equity portfolio is concerned. While asset allocation is an ideal way to diversify into various asset classes, it does not hurt the investor to buy protection using put options especially when the volatility is low and premium levels are low too.
Imagine one has saved money for an important milestone and that milestone coincides with market corrections in 2000, 2008 or 2020. Derivatives are also an interesting asset class that can help generate regular income and enhance return over and above the performance of a vanilla portfolio.
Last but not the least, international investing through rupee denominated feeder funds or by sending remittances through the liberalised remittance scheme can help an investor build a portfolio of investments that are ordinarily not available to them in India. A portfolio denominated in foreign currency also acts as a hedge against rupee depreciation.
Business models for wealth management in india are increasingly moving in the direction of all in advisory. This model where the advisor does not receive any remuneration from a third party asset manager is client centric and transparent and is the model that all investors should gravitate towards to ensure their best interest.
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