Choose the Right Financial Asset – Equity / Debt / Gold / Real Estate
In this article, we are going to discuss how one can invest smartly during economic slowdown. In these challenging times, how and where one should invest, because choosing the right financial asset between equity / debt / gold / real estate is very crucial in building the financial portfolio.
Invest Smartly During Economic Slowdown | Where One Should Invest?
There are 4 main type of asset classes in which Indian Investors invest overwhelmingly.
Entry into Equity Market with High Returns Expectations
- The current economic slowdown and a volatile stock market are two main reasons spreading the nervousness amongst the investors. Many investors started investing in mutual funds in 2018 after the ‘Mutual Fund Sahi Hai’ awareness program by conducted by AMFI (Association of Mutual Funds in India).
- The investors had started investing mutual funds with a high expectations of returns, just by seeing the higher side trailing returns specifically from Mid cap and Small cap funds in 2017-18.
- However, now they are wondering whether they have made a mistake by investing in equity mutual funds. Because since the peak of January-2018, Mid Cap Index has corrected by 25%, while the Small Cap Index has corrected by almost 40%.
- On the other hand, Nifty is up around 7% for the same period. Some good stocks are pulling up certain indices, but most mutual fund schemes are gazing at losses.
Equity Mutual Funds – Benchmark Trailing Returns
- With this scenario, some investors are thinking whether they should stop their SIPs in equity mutual funds.
- Others are feeling depressed after comparing the negative returns offered by equity schemes with decent returns offered by fixed deposits, debt schemes, PPF etc.
- Some fainthearted investors are looking at even to sell their equity mutual funds.
- Debt Funds :
- Close-ended debt funds (Fixed Maturity Plans) :
- These plans invest in various types of fixed income options such as bonds, bank certificate of deposits etc. which mature on or before the maturity date.
- Open-ended debt funds
- These funds are considered less volatile than equity thereby offering stable returns as compared to equities. They also invest in various debt instruments such as corporate bonds, treasury bills, government securities etc. These schemes are professionally managed by debt fund managers.
- There are different types of debt mutual funds such as liquid funds/money-market funds, short-term income funds, gilt funds, corporate bond funds etc.
- These funds invest in various instruments of different time horizons and carrying different levels of risk. An investor can invest in these funds depending on his/her time horizon and risk appetite.
- Close-ended debt funds (Fixed Maturity Plans) :
- Fixed Deposits (FD) :
- Bank fixed deposits (FDs) is another popular investment option which offers fixed returns. One can invest in a bank FD by visiting his/her branch or via Net-banking.
- Bank FDs offer cumulative and non-cumulative options. In the cumulative option, the interest is re-invested and payable on maturity whereas, in the non-cumulative option, interest is payable periodically (monthly, quarterly or annually depending on the bank).
- Interest is added to your income and taxed as per your income tax slabs. Interest is subject to tax deducted source (TDS).
- During the recent volatile or falling equity market since IL&FS crisis, investors saw the appreciation in the value of the Gold and can easily get fascinated towards it as an investment option.
- From an investment perspective, it is true that during short term turbulent times, gold has historically provided some safety cushion against riskier asset classes like equity.
- However, when we look at relatively longer time periods, gold has underperformed equities. For example, since the beginning of this decade till prior to the IL&FS crisis in mid 2018, gold had generated a compounded annualized growth rate (CAGR) of 6% vis-a-vis almost 10% for Nifty50.
- And this will always be the case in future also. The reason is that gold does not actually produce anything or create any value. Unlike equity or bonds or bank deposits, the money that you invest in gold does not contribute to economic growth. The same amount of money put into a good business or any other productive economic activity will create wealth.
- Hence, gold should not be viewed as an asset class to meet long term financial goals. If an investor wants exposure to gold, it should be from the perspective of stability in portfolio returns when other asset classes are performing poorly. Investment options in gold come in the form of :
- Gold Funds
- Gold ETFs
- Digital Gold
4. Real Estate
- People buy a house either for self-occupation or to earn rental income and capital gains from it.
- However, investing in real estate to earn rental income is not considered as a good investment. This is because:
- Rental income earned from house ranges usually between 2-3 per cent a year.
- The appreciation in the prices of house property depends on various factors such as size, locality, location etc.
- Before making an investment in property, one must evaluate based on safety, liquidity, returns and other similar parameters.
- Thus, Real estate investment is good from self-occupation perspective only, but one should not invest in real estate for getting regular returns from that investment.
Thus, in this kind of confusing mind state amongst the investors right now, let us try to answer how one can invest smartly during current economic slowdown phase.
Invest Smartly – Follow a Process Based Approach Rather Than a Product Based Approach
- One should build the portfolio by executing a proper financial planning rather than referring the trailing returns of any fund.
- A proper financial plan should be created in accordance with the parameters like :
- What is your financial goal?
- How much is the investment horizon?
- What is your risk profile?
- How much returns are you expecting?
- You can choose the suitable asset allocation strategy with respect to the financial goal and investment horizon.
- Thus, you should follow your investment strategies, especially in times of market volatility. You should always remember that equity investments are only suitable for long term, more than five or ten years.
- Thus rather than taking the panic decisions regarding your portfolio, one should use the current economic slowdown phase as an opportunity to make money. It is a good time to review your investments and diversify your portfolio.
- The key is to follow a proper financial planning approach, which is a process base approach. You need to stick to the financial plan, irrespective of any temporary or short term market movement. In this way, you can create wealth and meet your financial goals.
- One can assess the market conditions by linking it to your financial planning and current investments and redefine the path to your financial goals, if needed. Not making rash decisions and staying invested is the key to wealth creation.
- Market slowdown is a good time for you to check and correct your expectations from the stock market for the next couple of years. You need to realign your portfolio expecting returns accordingly.