Asset classes: What you should do in Samvat 2076

SBI recently announced a downward revision in interest rates on retail domestic deposits below rupees two crore leaving the depositors worried, more so the senior citizens who depend on interest income to meet their expenses. With equity markets going up and down like a yoyo and with the collapse of institutions like IL &FS, DHFL and PMC Bank, there is suddenly a trust deficit as it exposed the fault lines in the financial system. So let us try to understand the nuts and bolts of the different asset classes and how they have performed in the past and what does Samvat 2076 hold for investors.

Equity as an asset class

Like stock markets, Equity mutual funds had a roller coaster of a year with large-cap funds giving a return of 14.56%. However, their 10-year return was a surprising 9.75%, which was a shade above FD returns for a similar period, debunking the notion that equity investments give better returns in the long run. Mid-cap funds had a contrasting run as their 10-year return was 13.78% as compared to 7.79% in the last one year. Banking sector funds had a dream run in the last one year and gave a whopping 17.14% returns, mainly because most of the Banking funds had the top-performing private sector Banks like ICICI Bank, Axis Bank and Kotak Mahindra Bank in their portfolio. The ideal thing in the current scenario for an investor is a SIP in a multi-cap fund with a time horizon of 10 years and more.

Debt as an asset class

While the interest rates on bank deposits kept on falling relentlessly as the repo rates were slashed by a total of 135 basis points since February 2019, investors in Long duration funds were smiling all the way to the bank as these funds gave a massive 17.52% return despite some of the Bond issuers defaulting or delaying payments. Gilt funds, which have a sovereign guarantee and hence are not exposed to default risk gave a handsome 13.81 return during the same period.

For those investors who cannot stomach the risks in debt mutual funds, there are many Post office savings schemes, which look attractive as some schemes carry a higher interest rate vis-a-vis bank deposits. Some of them also qualify for tax benefits. Individuals below 60 years can consider investing in a 5-year MIS carrying interest of 7.60% or NSCs, which gives a higher rate of 7.90% for the same period in addition to giving 80C benefits. For senior citizens, the senior citizens' savings scheme (SCSS) with a 5-year tenure is the best bet as it has a coupon rate of 8.60%. However, there is a cap of Rs 15 lakh in SCSS. For those who are willing to lock their funds for long periods, they may consider investing in PPF or Sukanya Samriddhi yojana, where the interest rates are 7.90% and 8.40% respectively.

Gold as an Asset Class

Gold has always been popular within Indian households as an asset class, as it is used as a status symbol and as a hedge against inflation. A look at the above table reveals that gold has beaten equity and Debt in returns in the past year. The price of gold has gone up to $1505 per Troy ounce from $1235 in the last year – a rise of 21.86%. Though gold should be a part of every individual’s portfolio as it has a negative correlation with other asset classes, experts are of the opinion that it should not be more than 10% of the total portfolio. It is advisable to invest in a Gold ETF or the sovereign gold bond scheme, which are issued every month from October 2019 to March 2020 by the GOI.

That said, every investor must consider diversification in his portfolio importance of which was wonderfully explained by Harry Markowitz, the American economist and Nobel Prize winner in his modern portfolio theory. He highlighted that it is better if the securities in a portfolio have no correlation or negative correlation. Gold has a negative correlation with equity.

(The writer is a CFA and a former banker and currently teaches at Manipal Academy of Banking, Bengaluru)