Asset Allocation in 2021: The question is arising in the mind of investors that how to plan for investment in 2021 i.e. New Year.
Investment Planning: The year 2020 has been a difficult time in terms of investment. Now we have come to the end of the year 2020. In such a situation, the question is arising in the mind of investors that how to plan for investing in 2021 i.e. New Year. Which asset class to invest in. The things that are most important to keep in mind while investing are what is your financial goal, what is your objective behind investing and how much risk the market can take. Keeping these things in mind, investment planning should be done and you should reach your strategic asset allocation. Here is an overview of three common asset classes for 2021, including equity, debt and gold.
Debt Investment: What to Buy, What to Sell
In the calendar year 2020, the RBI has reduced the repo rate from 115 bps to 4 per cent. As interest rates fall, bond prices rise and hence debt mutual fund investment in spectrum benefits. Long-term bonds such as gilt funds, long durations funds and dynamic bond funds have given an average return of 15 per cent. Even this year, Mid to Short Duration Bond Funds, Corporate and Banking PSU Debt Funds have given double-digit returns.
If the same is expected in the year 2021, there can be a disappointment. This is because the interest rate cycle has increased downwards due to rising inflation and higher government borrowing. Due to this, the scope of further interest rate cuts is less. In such a scenario, it makes sense that debt mutual funds such as gilt funds and long duration funds book profits gradually from anywhere.
Though there may not be any further decline in interest rates, there is no hope of increase any time soon. Investors may look for corporate FDs and secondary market bonds for slightly higher returns (currently 6% to 7% annually for AAA-rated FDs and bonds). However, such investors should also consider credit risk and should not go overboard. 7.15 per cent RBI bond is another investment that is giving better returns. Regular income instruments like Senior Citizen Saving Schemes, Post Office MIS are currently giving 7.4% and 6.6% annual taxable interest.
However, Sukanya Samriddhi Yojana, PPF and EPF are getting 7.6 per cent, 7.1 per cent and 8.5 per cent tax-free returns, which are a better option on the parameters of security, returns and tax efficiency. However, if you look at liquidity, then ultra-short-term and short-term mutual funds can be a better option.
Equity investment: how to make strategy
Since March low, the Indian stock market has gained 80 percent due to liquidity and low-interest rates. Large-scale relief packages are being provided by governments around the world while emerging markets have benefited from the monetary incentives by different central banks. IT, pharma and to lesser extent chemicals, telecom and FMCG and quality large-cap have gained market support. At the same time, the market has also got a boost from the expectation of the vaccine for the treatment of coronavirus. In the recovery phase of the economy, the market has benefited from the boom in sectors related to the economy. This trend is expected to continue in 2021 where you will see profit-booking in the defensive sector and more investment in sectors related to the economy.
Overall, the sectoral rotation that we have seen so far will continue in the year 2021. In such a scenario, multi-cap or flexi cap mutual funds can be a good option for retail investors to take equity exposure. They have the facility to invest in every kind of market cap and sector.
Value investing is another subject where investment can be made. The big AMC has also raised money through NFO to ride on this theme.
Smallcap and Midcap can also return well in 2021. In recent times, he has outperformed. He had been an underperformer since 2017. Because the economy looked weak even before the epidemic and investors were far from them. An investment in quality smallcap available at a good valuation may be a better option than LORGECAP.
Along with equity, retail investors should follow the mutual fund SIP route or invest in direct equity only with advice from qualified professional advisors.
As a standard asset allocation, 10 per cent to 12 per cent of the portfolio is typically held in gold for hedging from risky investments. Sovereign gold bonds are a better option with 2.5% higher returns at the same time. At the same time, long term gain tax is found at the merger. Gold can provide a hedge. At the same time, it can also provide security, stability and liquidity.
(Note: This is the author’s own opinion. Be sure to consult the advisor before investing.)