We firmly believe that wealth is created by investing widely through an asset allocation plan that is suitable, given a person's age, family circumstances, goals and risk appetite. In this article, we will attempt to list out guidelines to help a salaried investors develop a robust investment plan.
A robust asset allocation plan will need to allow for long term wealth creations goals, savings to meet expenses in the future, and for emergencies. A younger person can take more risky assets, i.e. invest more in equities. Equities are the best option for long term wealth creation; however, they are more volatile than other asset classes. Therefore someone who is closer to retirement will need to shift assets from equities towards fixed income. In addition, one should look at add protection by buying life insurance via a term plan.
As a rough guideline, someone who is 25 should invest 75% of their savings in equities; about 20% in fixed income and 5% should be kept aside as cash. As you hit 40, one needs to add real estate to the mix, about 60% should be invested in equities, 15% in real estate, 20% in fixed income and 5% should be kept aside as cash. At the age of 60, only 40% should be in equities, 20% in real estate, 35% in fixed income and 5% should be kept aside as cash. It is important to invest on a regular basis in order to build wealth, and we would advise on investing a fixed amount every month.Fixed deposits and government run small savings schemes are traditional ways of fixed income exposure; however, these days there are options one should consider, like debt oriented mutual funds. They offer some advantages over traditional fixed income- they offer better liquidity and are more tax efficient. Returns of debt oriented mutual funds are higher, though the buyer is exposed to additional risk. A resilient economy will fuel demand for credit, also inflation in India remains low (Consumer price inflation for December was 2.19%), implying high real rates, which makes this space attractive. Investors also need to set aside some money for unforeseen expenses, besides keeping money in a savings account, liquid mutual funds are a good option for parking fund for short term needs.
This brings us to equities; investors can get access to equities via investing in stocks directly or via equity oriented mutual funds. Assets of mutual funds have grown significantly as investors have been willing to increase exposure to capital markets, especially in equities. In particular, we have been emphasizing SIP's in equity oriented mutual funds to our clients as a disciplined way of investing and building wealth.
Our analysis suggests that 2019 could be a good year for investing in equities. At the beginning of 2018, there was unbridled optimism, in contrast to the beginning of 2019. It is said that to make a bull market, you need to climb a wall or worry. The fact that there is plenty of worry about, and as markets get over these worries they are likely to climb higher. Volatility rose during 2018 and we believe it will remain high, this is not necessarily negative. Our message to investors is that investing in uncertain times will reap benefits in the long term
The top worry for everyone is the upcoming elections, the political outlook is clouded. Our research indicates that markets have risen by 12.5 (on an average) %in the six months following the elections after the last 4 elections, these resulted in a government that lasted a full term. We believe that if elections result in the formation of a stable, reform oriented government, markets will move up. The first half may be subdued, but second half of 2019 may be more promising.
However, it is not just the elections that can drive equity markets forward; the Indian economy has been resilient, IMF forecasts growth for FY2019-20 to be 7.4%, which is a strong number. More importantly the growth driver is changing from private consumption to investment spending. Gross Fixed Capital Formation (GFCF) increased by 12.5% YoY during Q2FY19, the third consecutive quarter of double digit growth. This can potentially boost corporate earnings growth which can drive the next leg up for equity markets.The banking sector is past its worst - the financial stability report of the RBI points out that asset quality of banks improved as the GNPA ratio of decreased from 11.5% in March 2018 to 10.8% in September 2018 and NPA are likely to decline going forward. The liquidity crisis following issues in NBFC sector is a risk, however, we believe this is a temporary blip and the economy should be able to overcome these headwinds.
Growth rate in the global economy is likely to slow down. Many have voiced the fear of a recession. Our analysis indicates that a recession in 2019 is unlikely. Certainly data from Europe, Japan and US points to a slowdown. Data from China is more concerning; however, it has loosened monetary and fiscal policy and has plenty of tools at its disposal to counter a slowdown. In an increasingly integrated financial system, events outside India can have a significant impact. The good news is that domestic institutions are increasingly becoming a larger part of the market and this can make Indian markets more resilient.
In conclusion, the best option for domestic investors would be to stay the course and invest in equities. In addition as part of a broader asset allocation plan add fixed income. Investing via an SIP is a way to build wealth in a disciplined manner. In this quarter, buy mutual funds under ELSS to maximize gains using tax saving avenues.
(The author Rajiv Ranjan Singh is the CEO of Stock Broking)