And just like that, the year 2021 is over. The world was 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 recover. Consumer spending rebounded and businesses remained confident.
As we move into 2022, the new Omicron variant comes with increasing risk. The pandemic can end in one of two ways, either we hit ‘zero Covid-19’ or disease becomes a permanent fixture on the infectious disease coterie. We believe societies will have to adapt to live alongside Covid-19. So having a contingency fund set aside for emergency purposes is of the utmost importance now more than ever.
One of the methods used by central banks was to reduce interest rates to increase demand. This, along with the major disruption in logistics (from chip shortages to disruptions to shipping routes), has resulted in increased inflation. One of the main factors, besides the new waves of the pandemic, is said to be the tightening of interest rates as central banks focus on containing inflation.
Here are the four main avenues for investment for 2022.
1. Model portfolios
- Volatility is here to stay – As markets correct themselves after hitting highs and losses begin to loom, it becomes difficult to avoid making emotional decisions to reduce 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 times of market volatility, when your risky investments – stocks (domestic / global) may fall, the overall performance of the portfolio may not be so badly affected. A diversified portfolio of complementary assets helps you smooth returns in times of volatility and helps mitigate portfolio risk.
Model portfolios organized according to investor risk-return profiles are best suited to volatile market conditions. Portfolios can be built with a different weighting between cyclical and non-cyclical stocks. Portfolio returns are average weighted returns, that is, the returns lean towards the sector with the most weight in the portfolio. Model Portfolios are backed by solid research and advice and focus on the below aspects when investing:
- Sector diversification – The model portfolios are diversified among various cyclical sectors such as banking and finance, automotive, metals, infrastructure and real estate. Non-cyclical sectors include IT, Pharmaceuticals, FMCG and Consumer Goods.
- Market capitalization diversification – Market capitalization is another factor that should be taken into account when selecting stocks. These portfolios are well balanced between large, mid and small cap stocks. Large cap stocks are stable and generate moderate returns. Small and mid-cap stocks are more volatile and have the potential to generate higher returns.
- Portfolio rebalancing – Equity portfolios require rebalancing because risk and returns are strongly associated with market volatility. Rebalancing the portfolio allows you to make 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 share. When the markets go up, it’s easy to have FOMO and rush to the next ‘hot’ stock, whether it’s an IPO or a ‘valuable’ security that someone is telling us about. speak. Instead, consider investing in baskets. A basket is a collection of multiple securities that can be traded in a single order. The components of the baskets are selected based on a particular strategy or theme. They’re curated and are based on research done by professionals whose day-to-day job is to do just that. An investor can select a predefined basket or create a personalized one according to their preferences.
A few baskets are described below based on various risk-reward profiles:
- Low risk – Multi-asset basket
Investors with a low risk appetite 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 fight against the risks of concentration and volatility. A periodically rebalanced multi-asset basket can generate slow and steady returns to meet long-term financial goals.
- Medium risk – Diversified sector rotation
Various sectors are in the spotlight depending on the economy. Sometimes Pharma can do well, and at other times defensive actions can do well. Being able to overweight (or underweight) a sector does wonders to generate an Alpha (outperformance). Having an organized basket that has a sector rotation strategy would be great in volatile conditions.
3. Global investments
Let’s face it. Over 50% of all the brands you know – be it Google, or Pepsi, Zoho or Nike, which we know well and consume in our daily lives are not listed in India. Incorporating them into our portfolio is not only good for diversification, but also gives us opportunities to participate in the global economy. Globalization and digitization 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 can do.
There are different ways to do this. One of the best routes is the LRS route.
The liberalized rebate program or LRS allows us to make international investments in assets such as stocks, mutual funds, exchange-traded funds (ETFs), etc. Discounts for these transactions may be made through licensed brokers in accordance with RBI guidelines.
As with Indian stocks, we recommend that you invest in baskets – especially sector / country rotating baskets – as this part of your portfolio is definitely long term.
4. Company term deposits
Business term deposits are term deposits offered by several companies and NBFC. They offer higher interest rates than savings accounts and term deposits. Corporate FDs are regularly rated by rating agencies to review the financial stability of the issuer. It is recommended that you invest in well-rated corporate FDs 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 better suited for retail investors. Investments can be made in SIP or flat-rate mode.
- Since there are no lock-in periods, 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.