– Make equity and debt your big bets this investing season, says A. Balasubramanian
A. Balasubramanian | 12th Jan 2015 | The Telegraph India

The election results in May last year brought about a lot of change in the capital markets and India Inc’s expectations. The outlook towards India is now of hope and optimism, which not only drives everyone to deliver the best, but also helps to improve the situation. And whenever the hope of economic revival rises combined with optimism, equity as an asset class does well.

Ultimately, it is the consumer sentiment that fuels economic growth. This along with the focus on stepping up capital allocation towards building infrastructure helps to create opportunities for jobs, more demand for raw materials, increased labour activities and so on.

Such factors drive the profitability of companies operating in the market, which in turn improves the confidence of companies to either reward the shareholders or look at making fresh commitments to expand to the next level. India Inc today is at the cusp of such a level. I would imagine a phase of consolidation where we should prepare ourselves for greater growth as we move forward.

Mood upbeat

There is a widespread belief that Indian companies will do far better than the last few years. It’s generally being said India had grown despite the challenges. Now, with the focus back on reforms and their execution, there will be a greater need to believe in a strong outcome.

The probability of an earnings upgrade for Indian firms is very high. Under such circumstances, the markets remain firm with less volatility combined with higher predictability.

If government finances improve on the back of a moderation in inflation, the overall growth momentum will further get a fillip through monetary policy action in the form of interest rate cuts. In such a situation, it is necessary to allocate capital in various asset classes.

Asset watch

Just as companies allocate capital in various businesses on an ongoing basis, investors, too, have to look at allocation in various asset classes to generate better risk-adjusted returns on their investments.

One asset class that does badly in a rising economic growth and falling inflationary scenario is gold. Gold as an asset class does not carry any big merit to be part of the investment portfolio of investors. Any investment in this class needs to be made keeping in mind the future needs for specific purposes, such as marriage.

Real estate as an investment has delivered the best possible returns in the last decade or so. While the government looks to lift the economy, it may focus on a) increasing the supply of housing projects b) increasing the revenue to state government in the form of tax and stamp duty, and c) setting up a real estate regulator to bring in uniform treatment across the country. The government has to make investors look at this asset class more on a need basis rather than only as an investment opportunity.

This leaves two other asset classes that can be made part of the investment portfolio – equity and fixed income. It is believed that both the asset class should do well in the future.

The earnings of companies are likely to rise on the basis of an improved economic condition, both globally and locally. Moreover, efforts to control inflation will result in the lowering of interest rates. This obviously makes a compelling case for investing in both these asset classes.

The minimum tenure for long-term capital gains has been extended from one to three years (other than equity-oriented funds) in the Union budget for 2014-15. This means investors will have to remain invested for at least three years if they want the benefit of lower tax on long-term capital gains. This change in the tax rule has changed the outlook towards these asset classes.

While one needs to look at both debt and equity asset class in the portfolio, the lower exposure to equity needs to be corrected by increasing the allocation to diversified equity mutual fund schemes.

Diversify to gain

Most of the time, investors have questions or confusion about how to go about choosing a scheme.

One should remember that no one asset class performs in a linear fashion, that is in a single straight upward graph. Taking into account the non-linear performance of various equity products, one needs to have an exposure to large cap, multi-cap, mid-cap and balanced funds.

Each of these categories focuses on a certain segment of the market and all of them are poised to deliver long-term return to shareholders/investors. Therefore, one should invest in a basket of schemes, either within the same mutual fund or across multiple schemes.

In the case of fixed income, given the interest rate view, you may consider open-ended fixed income schemes, from short-term to medium-term funds. The provision of extending the minimum holding period for capital gain benefit on debt funds to three years from one year has brought debt mutual fund schemes on a par with traditional instruments such as fixed deposits.

Hence, it makes sense to increase the allocation towards open-ended fixed income schemes, such as liquid plus, short and medium-term plan and dynamic funds for short-term goals.

Debates around valuation, should I invest now or later, should I invest in instalments or in lumpsum, can be addressed by first making a beginning and then continuing the discipline of investing at all periods.

The overall outlook towards better days ahead has increased strongly, supported by commitment to take the Indian economy to the next level of growth. This warrants us to put belief on the table on our asset allocation to benefit reasonably well on such investments.

The author is CEO of Birla Sun Life Asset Management Company

Source : http://goo.gl/Rm8ta7