If you have a surplus of Rs 10 lakh to allocate, it would be wise to hold the surplus in arbitrage funds for the short term and buy on adverse news-related dips into value and banking stocks/funds at this point.
Whether it is the COVID-19 pandemic or clouds of the Russia-Ukraine crisis hovering over the markets, one thing remains certain — an investor must be prepared for a higher probability of events causing disruption in the world and correspondingly affecting markets at large. Volatility is likely to be around for the rest of the calendar year 2022.
Regardless of any such events disrupting the global landscape, disciplined asset allocation based on your unique risk profile and risk tolerance level is the only way to protect and grow your wealth.
In the short term we are expecting upward pressure on commodity prices which could have an impact on India since it feeds into inflation.
Following sound asset allocation
As a practice for disciplined investing, asset allocation is critical and ‘events’ should not be triggers to either panic or rebalance. Following your long-term equity strategies should be the ideal way. Based on your risk profile you can allocate your investments across equity products, debt products, gold and alternatives. A sample asset allocation chart is given below.
Where to invest a surplus of Rs 10 lakh?
At current market levels, your asset allocation may have moved to a higher weightage in debt due to the fall in equity markets. It is prudent to rebalance in phases to participate in the long-term equity upsides that exist.
If you have a surplus of Rs 10 lakh to allocate, it would be wise to hold the surplus in arbitrage funds for the short term and buy on adverse news-related dips into value and banking stocks/ funds at this point.
Value stocks are under-priced, focused on sectors like manufacturing / automobiles/ chemicals, etc and will rebound as attractive sectors for the future. On the other hand, banking stocks will reflect economic recovery faster as it unfolds and give exposure to multiple sectors of the economy at one go.
Equities look attractive
Equity investments are considered as an optimal way to hedge your portfolio against inflation. Long-term index returns for Nifty and Sensex indices are in the 12 percent to 15 percent compound annual growth rate (CAGR) range, which is considerably higher than India’s long-term average consumer price inflation (CPI) of approximately 5 percent to 6 percent. This translates to 6 percent to 9 percent real returns on investments in the long term.
Another 10 -12 percent fall on events from current levels cannot be ruled out, which would make it attractive to enter the market for a return expectation of 15 percent per annum over the next 2 years.
High yield bonds with a medium to short term duration are also a good option to ensure that your investments earn a positive real return (adjusted for inflation).
The sector has traditionally proved to be a good hedge against inflation as property prices tend to witness price increases over the long-term. Real estate investment trusts or REITs are an easy way for you to gain access to real estate investments without having to shell out a fortune to buy them.
Increase in inflation erodes the value of the currency thereby also devaluing in value vis-à-vis other dominant global currencies. International investments through feeder funds / fund of funds (FoFs) or other offshore investment avenues can be explored particularly in US or euro-denominated assets to diversify the portfolio.
While gold has historically been an excellent hedge against inflation, more recently, gold has been witnessing a higher degree of volatility. A small allocation of 5 percent of overall portfolio could still be made by way of Gold ETFs or Sovereign Gold Bonds.