The Union Budget 2023 is in and the new financial year (FY24) is a little over a month away. While there are some new and developing trends to be sure, do remember that one thing is constant in the financial world – and that is the need for knowing yourself.
“To be successful, an investor must first understand his risk tolerance and emotions before embarking on the investment journey,” says Rahul Jain, President and Head, Nuvama Wealth.
Before testing the (financial) waters, s/he must be able to assess the ability and willingness to take risks.
Do note that the investor should be able to keep fear and greed at bay, as they can sway decision-making in the wrong direction, particularly during extreme volatility.
Experts opine that a portfolio of stocks that is diversified across sectors or a portfolio of mutual funds that is differentiated across various schemes from different fund houses can provide an investor with the much-needed stability to ride out choppy market conditions.
“Though the domestic economy looks poised for a cyclical recovery, geo-political tensions and high interest rates could keep markets volatile in 2023,” says George Thomas, Fund Manager- Equity, Quantum Fund.
Thus, an asset allocation with a mix of gold and equity after setting aside an emergency corpus would help investors to tide over market volatilities. Gold turns out to be a good diversifier during volatile times.
Thomas advocates a gold : equity mix of 20:80 after keeping aside 12 months of expense amount as an emergency corpus (12-20:80) works well for 2023 and beyond.
"Your budget, investment style, time horizon and risk tolerance should be the first step. The second step will be doing asset class research,” says Prashant Joshi, Head Family Office, Upwisery Capital Advisors LLP on your investing style post the budget, in the new year.
So for example, in debt, look at the credit rating, the Yield to Maturity and modified duration.
For equities, the company's fundamentals, future relevance and its uniqueness are vital to finding quality stocks.
Be it debt or equity, certain documents, such as a company's annual report, reveal critical financial information and risks. Research whether the management is efficient, operations are stable, and its track record is imperative.
Most financial planners use a savings ratio of 40% of income, which is sufficient to meet important life milestones like sending kids to college, buying a house, and retiring comfortably.
Now for some good news for conservative investors; your old-fashioned bank FD just got a lot more attractive post the budget.
“There is now a situation where banks will be forced to hike interest rates on Fixed Deposits (FD) in order to remain competitive,” points out Abhinav Angirish, Founder, Investonline.in. Angirish was referring to the recent Budget 2023 which unveiled a new savings plan named Mahila Samman Savings Certificates with a two-year maturity, offering a competitive interest of 7.5% per annum. This move means that banks will automatically have to hike rates to stay in the game.
“Debt funds may be an excellent idea this year for those seeking higher returns on their fixed-income investments,” says Jain. Experts feel that debt funds will make a comeback and provide significantly higher returns than traditional fixed deposits, going forward, as inflation and interest rate hikes stabilize.
Experts give us an idea of the returns that we may expect…
For retirees seeking safe ways to supplement their income, Budget 2023 has some positives. Finance Minister Nirmala Sitharaman has revamped state-backed programs by raising the maximum investment in programs like the Senior Citizen Savings Scheme (SCSS) and the Post Office Monthly Income Scheme (POMIS).
However, mutual funds like income funds remain the best bet for those seeking regular income. Income funds are classified as debt mutual funds, which invest their capital in a variety of debt and equity instruments such as bonds, certificates of deposit, and securities, amongst other options.
Income funds have historically provided investors with higher returns than deposits because they are managed by fund managers who keep the portfolio in sync with rate changes without jeopardizing the portfolio's creditworthiness.
They are most suitable for those who are risk-averse and have a perspective of two to three years. For example, liquid funds have delivered returns between 5.07% and 5.33% in one-year period, beating the savings account interest rate. Short duration funds have delivered returns between 5.92% and 7.37% in a three-year period and medium long duration funds have delivered returns between 5.80% and 7.12% in a five-year period.
Now comes the tricky part, knowledge…
You may do this (research) on your own.
Jain gives us some guidelines for both debt and equity. In equity, look for pedigree, vision and qualities of management, corporate governance, business model, competition, and business opportunities.
Similarly for MFs, look for the pedigree of the fund house, qualifications and experience of the fund manager, performance history across market cycles, risk and expense ratios, and adherence to the stated investment objective.
“In order to mitigate the risk of severe financial loss, a diversified portfolio containing asset classes whose investment returns fluctuate in response to changes in market circumstances is recommended,” advises Angirish.
Stocks, bonds, and gold have not experienced synchronized increases and decrease in return over the course of history. Do note, that when the market is favourable, one asset class will typically perform well, while another will typically perform averagely or poorly.
So, an investor may lessen the possibility of losing money by investing in multiple asset classes, which will also result in more consistent overall investment results for your portfolio. “The ability to diversify your portfolio means you may mitigate losses in one area by reaping higher returns in another thus offsetting a decline in investing performance,” notes Angirish.
Target maturity funds, theme-based stock baskets, and market-linked debentures are investment options that are gaining increased popularity, notes Jain.
Another innovation in 2023 is technology and AI (artificial intelligence) to help you in your decision making.
“For investors, AI can catalyse machine-based identification of investment opportunities,” says Gagan Singla, MD - blinkX by JM Financial. This translates into an accelerated response time, enhances the quality of research and increases the focus significantly for data analysis.
AI also includes tailored products, personalised user experiences, and intelligent chat interfaces. AI is likely to gain increased traction going forward.
And if you are little old fashioned, there is always your investment advisor.
An advisor, in addition to statutory requirements, should have a passion for financial planning and wealth management as it allows him to stay informed and garner knowledge in today's evolving markets. One should have a profound analytical ability to analyze and perform impact analysis on the portfolio, which can occur from various events affecting various metrics, such as standard deviation, beta, strategic asset allocation and tactical asset allocation, to name a few.
“Experience across at least two market cycles is preferred as it enables one to understand the vagaries of the markets and asset class behaviors and their nuances over time. Compassion and the ability to put a client's interests first are mandatory," says Joshi.
But perhaps at the end of the day in the new year, one fact remains a constant – staying the course.
Regular savings and investments based on asset allocation are what make a difference when it comes to building wealth. “Investing knowledge, market timing, and income all play minor roles. Time is money, so value it. The longer an investment is held, the more likely it is to grow in value,” says Jain.
Manik Kumar Malakar is a personal finance writer.