Following the discovery of the new variant of Covid-19, Omnicron, which is spreading rapidly across several countries, investor sentiment has dampened, and benchmark stock market indices have experienced sharp volatility. Both S&P BSE Sensex and NSE Nifty 50 have crashed. Omicron has added to long-standing issues such as rising inflationary trends, an indication of tapering the fiscal stimulus, and imminent rise in interest rates by the US Federal Reserve and global supply disruptions. Since the beginning of Oct 2021, FPIs have been net sellers and have sold Indian equities worth Rs. 15,851 crores. Through this article, investors can get an assessment of where the outlook for equity, debt and gold stand.
Equity
From an all-time- high of 62,245 on October 19, 2021, the Sensex has corrected over 9% as of Dec 22, 2021.
Generally, a correction is considered to be a fall of more than 10%. Investors are worried that this would hurt economic recovery and spill over to the stock market.
Source: Morningstar Data as of Nov 30, 2021
While it is too early how the new Covid-19 variant will impact the economic recovery, investors need to exercise caution and avoid any hasty decisions.
Gold
Regarding Gold, growing unease over multi-decade high Global inflation figures and Biden’s $1 trillion infrastructure bill, which will again increase the liquidity in the economy, will prove to be tailwinds for Gold. On the other hand, dollar strengthening and aggressive tapering stance by US Fed Reserve will prove to be headwinds for Gold.
Debt
Though the repo rate and reverse repo rate remained unchanged at 4% and 3.35% respectively for the 9th consecutive time at the December RBI Monetary Policy to continue the accommodative stance, rising inflation might force RBI to gradually increase the pace of policy normalization. It has however decided to continue and increase the liquidity absorption under the 14 days variable rate reverse repo (VRRR) facility. Accordingly, the interest rate on short term debt instruments (up to 2 years maturity) should also move higher.
We believe investors can use a combination of liquid to money market funds to benefit from the increase in interest rates in the coming months; along with an allocation to short term debt funds and/or dynamic bond funds with low credit risks should remain as the core fixed income allocation.
Since Assets are cyclical and dependent on macroeconomic indicators, it’s not easy to pick a winning asset class. However, to help investors diversify their investments and enable them to reduce downside risks, they can follow the 12-20-80 Asset Allocation Strategy.
12 months of Safe Money: This is the first step before investors invest in equity or debt to grow their second income. Often, investors tend to redeem from their equity mutual funds to meet their urgent short-term needs, thereby disrupting their long-term wealth goals. So, it is imperative that investors need to have a financial backup for a rainy day evident during the Pandemic and subsequent lockdowns and economic displacement. This can be placed in bank accounts or liquid funds, which provide access to ready liquidity whenever the need arises.
20% to Gold: Irrespective of correction in Gold prices, the long-term fundamentals of Gold hold intact and investors can allocate 20% of their portfolio to the yellow metal. Investors can use price-efficient and liquid forms of Gold investment such as Gold ETF and Gold Fund of Funds with underlying investment in Gold ETFs.
80% to Equity : After setting aside emergency money and investing in Gold, the balance of 80% can be invested in a diversified equity bucket that is not biased towards any sector, theme or market cap.
Consider an investor Amit who has a goal for wealth creation. Now, he has total investment pool of Rs. 2,00,000 and his monthly expenses are around Rs.10,000 per month.
Step 1: As a preliminary step, Ajay need to set aside 12 months of expenses in his emergency fund amounting to Rs.1,20,000 in a Bank Savings Account and a Liquid Scheme.
Step 2: He sets aside 20% of his corpus in a Gold ETF and Gold Fund of Funds that amounts to Rs.16,000
Step 3: He finally diversifies his equity allocation among three funds: An Equity Fund of Funds, an ESG (Environmental, Social & Governance) Fund and a Value Fund in the 70-15-15 ratio.
For illustrative purposes only. Please note the above is suggested fund allocation only and not an investment advice / recommendation.
Also, here are some more pointers to remember:
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Unless investors have met their financial goal, they should ideally not redeem or book profits from their investments.
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What investors need to remember is that while the correction is likely to persist in the near term as valuation adjusts to the earning moment, India has made a remarkable recovery after two subsequent waves of Covid-19 and equity markets have rallied close to 20% YTD.
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Investors can avoid allocating fresh investments via lumpsum and stagger their investments.
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