It?s that time of the year again when you need to take stock of your investments. A review of the portfolio at predetermined intervals should be part of your wealth-creation strategy.
From January 1 to May 31, the Sensex generated less than 1% absolute return while fixed income ? both long- and short-term ? generated annualised returns in excess of 12% and 8%, respectively. But since June this year, the tables have turned. The Sensex has generated absolute returns in excess of 8% and while short-term fixed income is stable (8%), long-term fixed income and bond funds have generated returns in excess of 6%. Gold has been the biggest underperformer this year. After an unprecedented upward run since 2007, returns from the metal have been down more than 10%for the year. Real estate is another asset class that gave lukewarm returns this year. Rising inventories and delays by developers in handing over projects have resulted in soft prices.
Once again, this proves that the only friend you can rely upon is a sound asset allocation strategy. Getting the asset allocation right and staying put with the strategy is what will lead to optimum returns in a volatile world.
Asset allocation
Typically, investors in India have a bigger exposure to fixed income instruments such as debt mutual funds and the evergreen bank fixed deposit (FD) compared to equity, which has yet to find favour with investors given the volatility since 2008 and inadequate corporate governance. However, this anomaly can be cured with the asset allocation strategy, the framework of the investments.
Equity: It?s ?the time in the market? and not timing the market that ensures handsome returns. This was again proved right this year. Since August this year, the Sensex has delivered absolute returns in excess of 20%. For the whole year, the figure stands over 8%.
However, if you exited during the lows of August, you would be sitting on a negative return of over 10%. Always remember that equity is for the long haul and select stocks or diversified mutual funds with a horizon in excess of five years.
Debt: If you invested after May this year, the returns, especially those from long-term income funds, are underwater. Expecting interest rates to go down, the majority of investors got into duration funds and between June and August, interest rates actually went in the opposite direction. Therefore, now you would have to hold on to income funds for a longer duration. Short-term and liquid funds were more stable, generating returns in excess of 8%. In an investing horizon of more than 15 months, you could look at long-term debt funds. For an investing period less than a year, you are better off investing in ultra
short-term and short-term funds.
Gold: As part of an asset allocation strategy, gold will find a place. Although the pace of returns over 2007-12 is unlikely to be matched, a 10% allocation is desired. Gold returned minus 10% this year. Since the annualised returns over the 3- and 5-year periods are 7.5% and 14%, respectively, the yellow metal does not inspire much confidence.
What next?
Since 2008, you have witnessed two upcycles and downcycles, which again points out to the fact that a sound asset allocation strategy is integral to wealth creation. Investing should be looked at as a process and not as an act of chasing returns. The asset classes, whether equity or debt or real estate, are tools for wealth generation and employing the right tool, in the right degree, is the answer. Chasing returns almost always ends up in disappointment.
The writer is founder and managing partner of Zeus WealthWays LLP
