And just like that, the year 2021 ended. The world looked both different from a year ago and very similar. It amazes us how some of the basic financial planning tips that can have a huge impact on anyone’s life are taken for granted.
Living with Covid-19:2021 has taken us a long way back to normal. Despite the Delta wave in the first half of the calendar year, the country remained open for most of the year and the economy started to gain momentum. Consumer spending rebounded and businesses remained confident.
As we enter 2022, the new Omicron variant poses increasing risk. The pandemic can end in one of two ways, either we reach “zero Covid-19” or the disease becomes a permanent part of the infectious disease coterie. We believe societies will have to adapt to live alongside Covid-19. Thus, having a contingency fund set aside for emergency purposes is of utmost necessity, now more than ever.
One of the methods that central banks had resorted to was to cut interest rates to increase demand. This, along with the major disruption in logistics (from chip shortages to disruptions to shipping routes), has led to higher inflation. One of the main factors – besides new waves of the pandemic – would be the tightening of interest rates as central banks focus on controlling inflation.
Here are the top four investment avenues for 2022.
1. Model Portfolios
- Volatility is here to stay – As markets correct after hitting the highs and losses begin to loom, it becomes difficult to avoid making emotional decisions to cut those losses. This behavioral error can be detrimental to long-term wealth creation. Your first defense against these mistakes is to create a diversified portfolio across different asset classes that match your investment horizon and risk tolerance. During periods of market volatility, when your risky investments – equities (domestic/global) may fall, overall portfolio performance may not be so severely affected. A diversified portfolio of complementary assets helps you smooth returns during volatile times and mitigate portfolio risk.
Model portfolios selected based on investors’ risk-return profiles are better suited in volatile market conditions. Portfolios can be constructed with a different weighting between cyclical and non-cyclical stocks. The portfolio returns are weighted average returns, ie the returns lean towards the sector that has the most weight in the portfolio. Model portfolios are backed by strong research and advice and focus on the below aspects when investing:
- Sector diversification – Model portfolios are diversified across various cyclical sectors such as banking and finance, automotive, metals, infrastructure and real estate. Non-cyclical sectors include IT, pharmaceuticals, consumer staples and consumer goods.
- Market capitalization diversification – Market capitalization is another factor to consider when selecting stocks. These portfolios are well balanced between large, mid and small cap stocks. Large-cap stocks are stable and generate moderate returns. Mid and small cap stocks are more volatile and have the potential to generate higher returns.
- Portfolio rebalancing – Equity portfolios require rebalancing since risk and returns are strongly associated with market volatility. Portfolio rebalancing helps to record profits in outperforming stocks and invest in underperforming stocks that have the potential to generate higher returns.
2. Recommended baskets of stocks and ETFs
Avoid buying a single stock. When the markets are rising, it’s easy to have FOMO and rush to the next “hot” stock, whether it’s an IPO or a “value” stock someone is telling us about. . Instead, consider investing in baskets. A basket is a collection of multiple securities that can be traded in a single order. Basket components are selected based on a particular strategy or theme. They’re curated and research-based by professionals whose daily job is to do just that. An investor can select a predefined basket or create a personalized one according to his preferences.
A few baskets are described below based on various risk-return profiles:
- Low Risk – Multi-Asset Basket
Investors with a low appetite for risk may choose to invest in a multi-asset basket. It can be a combination of stocks, debt and ETFs. The rebalancing of this basket makes it possible to combat the risks of concentration and volatility. A periodically rebalanced multi-asset basket can generate slow and steady returns to achieve long-term financial goals.
- Medium risk – Diversified sector rotation
Various sectors are highlighted depending on the economy. Sometimes the pharmacy can do well, and other times the defensive stocks can do well. Being able to overweight (or underweight) a sector does wonders for generating Alpha (outperformance). Having an organized basket that has a sector rotation strategy would work very well in volatile conditions.
3. Global investments
Let’s face it. More than 50% of all the brands you know – be it Google, or Pepsi, Zoho or Nike that we know well and consume in our daily lives are not listed in India. Including them in our portfolio is not only good for diversification, but also provides us with opportunities to participate in the global economy. Globalization and digitalization have made the world a small place, and they are here to stay. Being part of our portfolio strategy would probably be one of the best things you could do.
There are different ways to achieve this. One of the best routes is the LRS route.
The Liberalized Rebate System or LRS allows us to make international investments in assets such as stocks, mutual funds, exchange-traded funds (ETFs), etc. Remittances for such transactions can be made through authorized resellers as per RBI guidelines.
As with Indian stocks, we recommend investing in baskets – especially sector/country rotation baskets – as this part of your portfolio is definitely long term.
4. Corporate Fixed Deposits
Corporate fixed deposits are term deposits offered by several companies and NBFC. They offer higher interest rates than savings accounts and term deposits. Corporate FDs are periodically rated by rating agencies to review the financial stability of the issuer. It is recommended to invest in FDs of well-rated companies to reduce credit risk. Corporate FDs diversify the portfolio towards debt investments.
The advantages of these investment avenues are:
- The low minimum investment value makes them more suitable for retail investors. Investments can be made via SIP or lump sum mode.
- Since there is no lock-up period, investors can withdraw funds according to their financial goals.
While all of these investment avenues seem well suited for 2022, it is recommended that you make investment decisions after consulting your financial advisor.