“We are in a global recession”, “Indian markets cannot remain decoupled for a long time”, “It is time to reduce allocations from equities” are some of the phrases you might have heard on social media and frontline news.
Rising inflation has also made fixed income investments more attractive where the yields have gone up. In a rising interest rate scenario and uncertain equity markets, a common investor is left confused about his investment allocation strategies.
We believe that you must continue with your investments in equities especially if you are young and retirement is a few decades away for the following reasons (equities are anyways not for shorter-term goals).
No benefit of increase in interest rates
Despite RBI increasing rates for the fourth time in 2022, the benefit has not been passed on to the small savers. The interest rate for small saving schemes haven’t changed with respect to rate hikes done by RBI. The interest rates have remained stagnant at 7.1% for public provident fund, 6.8% for the national savings certificate and at 8.1% for employees’ provident fund.
The incentive for small saver has not really changed to think about higher allocations to the fixed income space. The situation is the same for Bank Fixed Deposits, rates for 1-year SBI fixed deposits were as low as 4.90% (10th September’2020) and currently are at 5.45%.
Let’s come to mutual funds, no doubt, yields have gone up, but how many retail investors have enough room to park money in debt mutual funds. Next point will cover this in detail.
Existing allocations to fixed income
For a salaried earner, a decent amount of income gets automatically channelised in fixed income investments like Employees’ Provident Fund and National Pension Scheme (minimum 25% in fixed income). These instruments help in reducing the tax outflows. When allocation to these instruments is high, it becomes even more prudent to think about higher allocations in equity to have a balanced approach.
For example, a person earning an annual income of ₹20 lakhs who has a basic salary of ₹10 lakhs, his total annual contribution to provident fund is already at ₹2.4 lakhs. Minimum fixed income allocation through NPS is ~ 37K (considering full deductions in 80CCD(1B) & 80CCD(2)). If these employees keep on allocating money in fixed income through mutual funds as well, their portfolio will be skewed to fixed income.
Falling markets are an opportunity for the long-term investor
During gloomy global macroeconomic situations, equity markets tend to be more volatile. This volatility gives opportunities to buy equities at lower levels. As long-term investors, we must hope that we are able to buy equities at lower valuations during the accumulation phase of our financial journey. Sideways or falling markets are a long-term investor's dream.
In a falling or sideways market, to rebalance the portfolio to pre-decided asset allocation, debt needs to be shifted to equities or fresh money needs to be deployed in equities.
Wealth creation opportunity in India
The per capita income of India is on the verge of exploding as Indians move from spending on necessities to spending on discretionary items. This growth in per capita income will not only improve the standard of living of Indians, but it will also lead to economic growth and wealth creation through equity markets. Clean balance sheets of corporations, lower tax rates, strong demographics, record tax collections and a stable government bode well for the long-term prospects of the Indian economy.
Any investor who has at-least ten years of runway ahead of him before retirement should have higher allocations to the equity markets. Mutual funds are the best instrument to participate in the long-term growth story of India. Wealth creation through equities has its own set of hiccups and this journey in the future is not going to be any different.
Any investor who is not well versed with financial markets must consult a professional who will not only help them ride through the volatility but also ensure that other aspects of personal finance like insurance, emergency funds, allocation for short-term financial goals are well taken care of.
Nishant Batra CWM® is Chief Goal Planner of Holistic Prime Wealth.
Disclaimer: The views expressed in this article are of the author, not MintGenie.