Making money, both in debt and equity markets, has become difficult. While annual returns from the Bombay Stock Exchange Sensitive Index, or Sensex, have been an impressive 26 per cent, any investor who entered the market a little later would reaped lower returns. In the past nine months (October 16–July 16), the Sensex has returned just 3.65 per cent.
Debt instruments have not done well either. The floating rate debt fund category has returned the highest, at 3.71 per cent, in the past nine months. The fixed deposit rate for the six month to one year range is an annualised 5-6.5 per cent. These returns would be hit further due to taxation on maturity.
Contrast this with the average monthly wholesale price inflation (WPI) rate of 7.05 per cent in the past nine months and average food inflation of 6.9 per cent. Even the consumer price index (CPI) rose by an average of 5.5 per cent.
Financial planners say at such times, a few changes to the portfolio can be made to beat inflation. “To achieve this, the strategy will need to be slightly riskier,” said Suresh Sadagopan, a certified financial planner.
The risk-taker — equity 80:debt 20: It is true that equities beat inflation over the long term. But at today’s levels, when the Sensex is trading at 17,500-18,000, investors’ portfolios would have probably just managed to reach the January 2008 levels. And, after staying invested for almost two-and-a-half years.
One solution could be sector funds. Several sector funds have outperformed the Sensex or the Nifty. For example, the six-month average returns of FMCG (fast moving consumer goods) funds have been 21.6 per cent. Pharma and banking funds have returned 19 per cent and 16.9 per cent, respectively, in the period. One-year returns for all three mutual fund categories have been over 52 per cent, with pharma funds returning a whopping 85.2 per cent.
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Similarly, some exposure to mid-cap funds can help.
There’s no need to go overboard. A good 10-20 per cent of the portfolio in sector funds, depending on your age, will pep up returns.
On the debt side, the investor can opt for floating rate funds. With interest rates on the rise, they can provide good returns.
Gold exchange-traded funds can be another portfolio diversifier. The annual returns of gold ETFs have been 22.7 per cent. Though lower than the Sensex returns on an annualised basis, the three and six-month returns have been higher, at around nine per cent.
The risk-averse — debt 80: equity 20: Look at a host of products to improve returns. For one, raise the equity portion, by either getting into gold exchange-traded funds or sector funds. An allocation of 10 per cent each in both types will ensure a more vibrant portfolio. “Debt instruments alone cannot give returns that can fight the current rate of inflation at 10.55 per cent. Investors need to hike their equity exposure by 10 per cent more,” said a certified financial planner.
In the debt portion, look at company deposits. Good companies are giving interest rates of 9.5–10.5 per cent, depending on the tenure. Some money can be moved to floating rate funds and fixed maturity plans (FMPs), which provide better returns than bank fixed deposits.
The 50:50 person — equity 50: debt 50: These investors can look at high-yielding debt instruments like company fixed deposits and FMPs.
“A person in this risk profile should maintain 30 per cent of overall equity exposure to mid- and small-caps through mutual funds,”said Sandeep Raichura, head, wealth management, Pinc Money. He advises that the person should refrain from sector bets, as over the long term (over five years), sector funds perform on a par with any good equity-diversified fund. Even gold ETFs can be looked at, but only up to 10-15 per cent. Financial planners said it would pay to stick to the basics of investing – equity investment should be done through systematic investment plans while the debt portion can be invested in a lump sum. Yes, there will be times of low returns. But like other things in life, it pays to stay disciplined.