If investors do not want to take risk of price volatility, then fixed maturity plans are also good options as the tenures of these plans are matched with the underlying instruments.
Mr Vishal Kapoor, Head — Wealth
Management, Standard Chartered Bank
Should you allocate high sums to equity SIPs? What should
you do when the last of the fixed-return options — the small savings schemes —
have an interest rate that swings every year? These are some of the questions
we asked Mr Vishal Kapoor, Head Wealth Management, Standard Chartered Bank. He
provides some solutions to these, along with investment ideas for 2012.
We see many mutual fund investors now allocating a larger
portion of their surplus or their salaries to SIPs? Is it a good strategy to
allocate such high sums?
If the SIP value is in line with the strategic allocation
planned for that person, then I would not be too concerned. For example, if a
person in his 20s is building a retirement nest, and the targeted allocation
for this person is 75 per cent equities, then for this person to have about
three-fourth of his monthly savings going in to a set of good funds through
SIPs may not be a bad idea.
This said, it is very important to try and diversify across
a few fund managers. It is also very important to choose funds carefully and
stay with consistent performers and with strategies that fit your requirement.
However, your point is right when it comes to senior
people. Taking high exposure to equity SIPs may certainly not be right for
somebody close to retirement.
Increasing large-value SIPs are also a validation that
a lot of people have benefited from SIPs. In the past, investors were
experimenting with a small proportion of their assets. For instance, when the
fund industry was relatively nascent, a large-value SIP used to be Rs
20,000-25,000 a month and the average was around Rs 5,000-8,000.
Nowadays, with income, savings and conviction in SIPs going
up, SIPs aggregating Rs 1 lakh a month are not uncommon. Many of them are the
same customers who in the past were toe-dipping with Rs 20,000-25,000 a month,
knowing fully well that their savings potential is much higher.
After having gone through a cycle they have now realised
that they actually did relatively well and SIPs did make sense. So they have
become more serious now and have increased their contribution.
With small savings options too being linked to interest rate
cycles, returns can also go down. What strategy should debt investors adopt?
Besides bank deposits, investors can explore the wide
array of fixed income products available through the fund route. In addition to
regular returns, this space can also offer the additional opportunity of
capital appreciation, especially in times when interest rates peak and are
expected to come off.
If investors do not want to take risk of price volatility,
then fixed maturity plans are also good options as the tenures of these plans
are matched with the underlying instruments.
They are also efficient on a tax-adjusted basis. Then there
are also fixed income instruments offered by non-banks. These may be deposits,
debentures or bonds, with some of them offering tax advantages as well.
But aren't the risk associated with corporate debt products
also high?
The fundamental rule when you invest in any product — equity
or debt — is that you need to understand the product you are buying. Debt is no
exception. You need to know and understand how the instrument promises to give
you a better return.
In general, one should be wary of instruments without a credit
rating. Yet another simple rule is to avoid a scheme that looks too good to be
true. Also, stick to names and companies that you have some understanding of.
We do a full-fledged due diligence on the products we
recommend. And yes, appetite for risk varies across customers. We may offer
only a triple-A rated product or a government security to one, while another
investor may be comfortable with an AA- .
It does not mean that a AA- is a bad product. But it may not
be suitable for someone who does not understand the difference in the risk
levels. So matching risk is important.
Would you advocate buying gold?
It has been a part of our asset allocation strategy for
customers to take a 5-10 per cent exposure to gold. But we have not yet changed
our medium-term recommendation on the asset class. Our house view on gold in
dollar terms is still 14-15 per cent higher than where we are today.
Why are we bullish? Gold continues to be a safe haven, given
current global uncertainties. Second, both India and China have real demand for
gold. It is not just a hedge or an investment. That will continue to drive
prices. Three, many Central Banks will continue to buy gold as reserves, with
their own currencies going through volatility. So that means more institutional
demand.
It is also a hedge against negative interest rate. That
situation continues with potentially high inflation and low interest rates
across the world. Gold then becomes a store of value by choice. We prefer a
financial asset based route to investing in gold, since it avoids the many
disadvantages of buying physical metal.
What are your investment ideas for 2012?
We think gold equities are a good opportunity, if you
believe gold is a sound asset class now. Traditionally, gold equity has a high
correlation with gold prices. It has the additional benefit of operating
leverage on top of the increase in commodity price. Gold equities have not
caught up with gold commodity rally. We see opportunity when gold equities
catch up.
The second theme we like are long-term gilts. That is based
out of our research view that interest rates should start coming off next year.
This is, however, only appropriate for the more sophisticated customers
who are willing to live with the volatility that gilts have.
The third theme that we think might be interesting is
international equities, in markets such as China or North-east Asia, as
valuations, after correction, look more attractive. Of course, international
equities can only be diversifiers to holding Indian equities.
Are you seeing more interest from NRI investors?
NRIs have always been very keen to invest back home.
If you look at the current environment, it now looks even more attractive for
them to invest. This is because you have a rupee that has sharply depreciated.
If you are an NRI holding a relatively strong foreign
currency, then you have a big conversion-rate benefit to start off with. Two,
interest rates differentials are huge between India and developed countries.
When you have triple-A rated bonds with tax-free status and eight per cent plus
rates, then it becomes very attractive for NRIs.
Source: http://www.thehindubusinessline.com/features/investment-world/market-strategy/article2744840.ece
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