Where to invest in 2023

In response to the central bank hiking benchmark rates in recent months, most of the banks have increased interest rates on Fixed Deposits (FDs) providing much-needed relief to individuals more so senior citizens depending on interest income. Gold and silver prices have gone up in the last few months with the latter going up by a whopping 25%. Stock markets were roiled with many issues including the news of the outbreak of the new Covid variant BF.7 towards the end of the year. Let us try to look at the different asset classes and understand how they fared in 2022 and what circa 2023 holds for investors.

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Equity as an asset class

The Sensex had a roller coaster ride starting the year at 58300, going down to 51000 in June and ending the year around 61000 levels. Though the Sensex gave a measly return of 4.65% Year To Date (YTD) it did reasonably well compared to many economies. Investors did not have a pleasant experience with IPOs. Many IPOs met with a lukewarm response while many were trading below the issue price. Compared to previous years the pace of opening demat accounts which have crossed 10 crore accounts slowed down considerably reflecting investor apathy. Going forward equity markets are staring at a likely recession due to a sharp increase in interest rates due to high inflation. In mutual funds, while large-cap funds gave a return of 5.47%, mid-cap funds gave a return of 4%. The geopolitical tensions haven’t receded yet and so far investors investing or continuing in mutual funds through SIPs seem to be the only sensible option during 2023. For investors wanting to invest lumpsum amounts, balanced advantage funds which have the taxation of equity are advisable.

Debt as an asset class

It was not a good 2022 for debt mutual funds with most of the funds delivering between 2% to 4% barring credit risk funds which gave a return of 14%.

Credit risk funds are mutual funds that invest in bonds rated AA and below and carry a high credit or default risk. A word of caution - investors with a high-risk appetite only should consider investing in credit-risk funds. The muted performance was due to the series of hikes in repo rates by RBI during the year to combat inflation. The silver lining though is that since the interest rate cycle seems to have peaked investors may consider investing in long-duration debt funds and can expect decent returns if they can hold on for two to three years. Investors who find it difficult to understand the dynamics of interest rates and bond prices can simply invest in dynamic bond funds and let the fund manager do the allocation between long-duration and short-duration papers.

For investors who cannot stomach the risks in debt mutual funds, there are post office savings schemes offering higher interest rates vis a-vis bank deposits. Some of them also qualify for tax benefits.

Gold as an Asset Class

Gold which gave a return of 13% had a good year and outperformed equity and debt. Gold will continue to benefit from the continuing geopolitical crisis and volatility in markets and should do well in 2023 also. Physical gold has always been popular with Indian households not as an investment option but as a status symbol. But do know that fake hallmarked gold is flooding the markets and is in circulation.

Though gold should be a part of every individual’s portfolio since it has a negative correlation with other asset classes, experts advise that exposure to gold should not be more than 10% to 15% of the total portfolio. Gold ETFs are better compared to physical gold since there are no disadvantages like storage costs or conversion or making charges or theft. Investors can think of investing in the sovereign gold bond (SGB) scheme 2022-2023 which is issued in tranches. The advantage with SGB is that you get an additional 2.50% interest every year during the tenure which is 8 years as also the exemption from long-term capital gains if you hold them till maturity.

Cryptocurrency as an investment option

Cryptos had a terrible year with prices crashing and exchanges like BlockFi and FTX collapsing. This along with regulatory uncertainty and taxes make investing in cryptos a risky proposition. With the government clarifying that they will not be making cryptos legal, investors are better off staying away from bitcoins and their ilk.

In the end, a diversified portfolio is one that will do well in both good times and bad times.

(The author is a former banker and CFA and currently teaches at Manipal Academy of Higher Education, Bengaluru)