Parking Funds In ‘New Normal’ India

Home » Magazine » Parking Funds In ‘New Normal’ India

Vishav, Yagnesh Kansara and Himali Patel - 01 March 2021

Recovery. Resilience. Resurgence. Revival…

There are quite a few more to add to the list of words imbued with the hope that the world embraced while entering the new year 2021. After one of the worst nightmares in human history, the planet hoped for a brighter tomorrow in an age of new normal.

With the COVID cases showing a steady decline across the globe, markets have begun picking up momentum. The Indian markets rebounded with renewed vigour after the finance minister tabled a growth-oriented Budget last month. The rollout of the vaccine earlier this year infused fresh optimism among people and positive global cues triggered an upswing in various sectors.

A revival in automobile looks imminent after a prolonged downhill drive that claimed thousands of jobs and dealt a body blow to the economy. Real estate, too, is rising from its decade-long slump. Equities scaled record highs after the Union Budget and commodities regained momentum, led by a huge spike in gold prices.

The equity outlook for the year 2021 has changed, believes Harshad Chetanwala, who had co-founded MyWealthGrowth.com. “Corporate India was able to cut costs steeply resulting in net profit margin bouncing fast, which was apparent from the third-quarter earnings of the financial year 2021,” he says.

The third quarter of FY21 was a strong phase, beating expectations across most sectors, led by margin surprises and even a slight beat on revenues, says Varun Lohchab, Head Institutional Research, HDFC Securities. According to him, sales continue to rebound at a faster pace than costs after the lockdown, resulting in an earnings beat. “The quarter third margins beat estimates across multiple sectors such as cement, IT, chemicals, paints, durables were driven by cost efficiencies.”

Although the recovery trend reflects that the COVID shock has pressed a reset button on most economic processes, the investor remains cautious and unsure what would be the best bet for his money.

Equity Market A Good Option

The stock market saw some correction later last month but the retail investor is hesitant to take a dip as the current valuations are still considered high. The price movement in stocks he is keen on buying – largely mid and small caps – makes him feel that he has failed to reap the best of the bull run. “You can board a train easily when it’s at the station, but when it starts moving, it’s nowhere as easy. Many investors may have missed the best part of this rally due to rear-view-mirror driving. Anyone entering now should invest in a staggered manner over the next three to six months because this period will further confirm the sustainability of economic recovery,” says Aashish Somaiyaa, Chief Executive Officer at White Oak Capital Management.

Somaiyaa thinks that while it may seem counter-intuitive, it is difficult to invest in an equity market with the “end of uncertainty” because that’s when markets behave the way they have been, making the entry harder.

So, what should the investor do? Well, there is a law of nature: whichever goes up, comes down. This is also true for the stock market. The prices that move up have to come down. There is no linear price movement in any stock or sector. Though the current valuations may look rich, one has to wait for the right opportunity, that will come sooner than later. That will be the right time to make an entry into the market/sector and the stock.

Current valuations provide only one strategy for the retail investors and that is: buy at every dip (accumulate). Every sizeable fall in the market will provide good buying opportunity, as the long-term trend of the market is intact, due to various factors.

In case of a long-term proposition, the return hinges on the investor’s patience. One has to keep in mind that the investment does not grow overnight and every good investment needs some time to produce handsome returns. Though the small and mid-caps have seen a run-up, there are still good stocks available in the category, experts believe.

A rerun of volatility in the stock market cannot be ruled out, though, given the air of uncertainty spewed up by the pandemic. According to Archit Gupta, Founder and CEO of ClearTax, the investor should enter the market with an investment horizon of longer than five years. A flurry of companies going public has made the primary market a safe bet for retail investors to make money in the short term. The proposed listing of the Life Insurance Corporation of India and two public sector banks has stoked optimism for initial public offerings (IPO) this year. Retail investors can make money from the listing premiums, as the recent developments indicate that every set of investors have benefited from the listing gains ranging 50-150 per cent.

Mutual Funds Look Impressive

While presenting her Budget for 2021-22 earlier last month, Finance Minister Nirmala Sitharaman proposed a permanent institutional framework to purchase investment-grade bonds in stressed times. The move is aimed to enhance the secondary market liquidity of corporate bonds. Debt MF managers believe it will enable confidence in the corporate bond market and instil confidence in investors who have been rattled with corporate bond investments in various debt fund categories.

Net outflows from income and debt-oriented schemes reached Rs 33,408.76 crore in January as against an inflow of Rs 13,862.77 crore a month back. Some of the debt categories like corporate bond funds, banking and public sector undertaking (PSU) funds and, short-duration funds registered new inflows. A new investor should look at the quality of the portfolio or the exposure of the fund to top-rated papers and the weighted average maturity of the portfolio. These are the basic checkpoints the investor should make a note of before investing in
any debt fund.

Growth and equity-oriented MFs witnessed net outflows for the seventh month in a row in January. Market experts attribute the continuation of net outflows from equity funds to profit-booking by the investors. The more conservative investor should ideally opt for equity savings funds, dynamic asset allocation funds or balanced funds as these invest in a combination of equity and fixed income markets as per their respective mandates. For the existing as well as new investors, systematic investment plan (SIP) remains to be one of the wisest ways to invest in the equity markets to average out the cost of investing over multiple market cycles.

Silver Shines Bright

The stock market has a theoretically inverse correlation with the gold prices. When markets around the world went into a deep recession and stock prices hit their nadir last year, the yellow metal looked brighter and, with the markets regaining momentum after the COVID scare began ebbing out, there was a price correction in gold. The metal crossed the Rs 55,000-per-10-gram mark around mid-2020 and it fell below Rs 50,000 towards the end of the year and stayed there. Silver, which matched steps with the yellow metal in price surge, kept up the rally. The spot market price for the white metal reached Rs 68,535 per kilogram, climbing 62 per cent from Rs 42,425 per kilogram in the same period last year.

As the world pushes harder for a carbon-free tomorrow, silver is expected to see a heightened demand. The price correction in gold gives silver the room to attract retail investors through commodity futures trading or through physical metal purchase from retailers. “Moving forward, gold is expected to trade sideways with an outlook majorly dependent on the way the pandemic is controlled and movement of the US dollar,” says Nish Bhatt, Founder and CEO of Millwood Kane International. “The investor should have a diversified portfolio with a certain portion of his assets in gold or silver, up to 10-15 per cent, or depending on his risk appetite.”

Gupta sees the Budget proposal to lower the customs duty on gold and silver by 2.5 per cent would be a big boost for investors. “You may not consider jewellery as an investment, as it comes with considerable additional costs such as making and wastage charges. Instead, you may invest in ETFs. The Budget 2021 proposed to introduce a gold exchange with Sebi as its regulator. This is a significant positive for gold ETFs. It will enhance transparency in transactions. Gold mutual funds are also a good option, compared to physical gold,” he says.

Realty Regains Ground

Experts are bullish on the recovery trend seen in real estate but they do not see it as an investment option for the short term. Lower interest rates and revised pricing have made the property market attractive and a pick-up across residential, commercial, retail and industrial real estate is expected in the near term, they believe.

“But, making a large-ticket real estate purchase as an investment is a tough ask. Staying with real estate, on the other hand, I do believe that with bank FDs, PPFs and debt funds giving poor returns, some of the REITs and, even INVITs, may be a good fixed-income replacement for retail investors,” says Somaiyaa. In fact, most experts feel that real estate has lost its charm with the emergence of mutual funds and people gaining knowledge about equity investments. Despite the COVID-19 pandemic lowering the property and interest rates, investing in realty is not advisable, they say.

“The past 10-year average return offered by real estate investments in India is around 10 per cent and the rate may vary depending on the city under consideration. On the other hand, most mutual funds have returned about 12 per cent over the same time frame, with some offering over 20 per cent. The cost of maintenance, annual property taxes, and a high tax on capital gains have made real estate an expensive investment option,” Gupta says.

There is a consensus that the pandemic is largely under control, the vaccination drive is in the advanced stage in most parts of the world, and the situation is returning to normalcy very fast. Under these circumstances, investors should look at capital preservation and long-term returns, rather than some short-term gains, in risky assets. “Remember, investing is a painstaking, time-consuming art,” says Bhatt.

***

Charting The Roadmap For Your Money

Equity Market

Best part of the bull run over. Expect realistic returns
Always choose equity as a preferred asset class that can deliver growth
Invest in a staggard manner over 3-6 months for economic recovery to settle down
Wait for the right opportunity to avail of the best prices
Keep an investment horizon of longer than 5 years
Make the best use of upcoming IPOs

Mutual Funds & Debt Funds

Look at the quality of the portfolio or the exposure of the fund to top-rated papers
You may opt for SIPs for assured returns
Look for equity savings funds or dynamic asset allocation funds or balanced funds as these invest in a combination of equity and fixed income markets

Gold & Silver