When the equity market trades at a high level, it becomes a matter of concern for investors, and some begin to transfer funds from stocks to the debt market. Not only retail clients, even FIIs and DIIs are starting to look for alternatives and convert part of their portfolios into debt.
Currently, bank FDs are not giving very promising returns. All the major banks have kept their FD interest rates close to 5.5%, which is almost close to the rate of inflation. If you live in an urban area, the inflation rate is quite high, i.e. almost 1% higher than the FD rate. So investing in FD will not protect you against inflation. So what are all the options you have as an investor when Sensex, Nifty is approaching the heights of life? Here are the first three: –
- Golden backgrounds: Government funds are debt funds that invest in government securities. Since these plans invest at least 80% in government securities, you are free to worry about the safety of your fund. Gilt funds can give up to 12% return, the five year average for Indian gilt funds is around 9%. But there is no guarantee of return on this product. There are other factors you should also consider when investing in government funds, such as an average maturity of 3 to 5 years. And your investment horizon must be in line with this mandate.
- Corporate Bond Fund: These are another good leveraged investment option. These funds invest at least 80% of the funds in the highest rated corporate bonds. Since funds are only loaned to large companies, which are able to repay debt when due, they are largely secure. Indian corporate bonds give yields of 8-9%. This option can therefore also be considered as part of the portfolio. But these funds run the usual credit risk and default risk and should be considered before investing.
- Gold Fund: The yellow metal has given almost 13% returns over the past year and is expected to perform well in the near future as well. However, it is not a debt instrument and its performance depends entirely on the movement of the price of gold. Consider gold as part of your portfolio and invest in it at least 10% of the value of the portfolio, as gold always offers long-term inflation protection. There are several choices available to gold investors, such as gold funds, gold sovereign bonds, and gold ETFs. Gold sovereign bonds have an advantage over other investment tools as they give investors 2.5% additional interest outside of the performance of the gold price and they also offer a sovereign guarantee.
Conclusion: If an investor fears high levels of stock indices, then he may invest a portion of the portfolio in debt securities and gold. But you shouldn’t take all the money out of equity because it’s hard to decide on the entry point once you exit the market. As in a recent case, after the first wave of Covid-19 when Nifty approached its previous high of 12,000, some investors exited the market, claiming that Nifty was not performing as expected. Yet the index has continually hit new highs and some of these investors are still unable to re-enter the market and have missed out on a great opportunity. So one should have a minimum of 40% of their funds in stocks all the time because you never know what could be at the top of the market in a year.
(Ravi Singhal is vice chairman of GCL Securities. His views are his own)