Good times ahead for investments in bond given RBIís dovish monetary stance
How much should one be exposed to equities and what proportion of oneís investments be put in fixed income is a question which plagues many a mind. In technical terms what your asset allocation should beóis as much a personal call as it is with regards the current economic environment. Factors like age, oneís risk-taking ability, current asset base, financial goals and the market outlook are the keys to determining how much should the allocation be in each asset class. While equities have the ability to generate higher returns, the associated risk with the asset class is also higher.
A broad thumb rule for allocation to equities is (100óage of individual). Thus if your age is 30, allocation to equities should be 70%. But as discussed earlier, oneís risk appetite also plays a crucial role for arriving at an asset allocation decision. For this, we identify investors into three categories of conservative, moderate and aggressive. A conservative investor who wishes to minimise his risks should allocate up to 20% of his capital in equities at the most. Similarly an investor with moderate risk appetite should keep his equity allocation between 20% to 40%. The aggressive investor may allocate between 40% to 70% of his capital in stocks.
Speaking of equities, buoyed by strong policy action by the government and central bank action globally in the US and Europe, Indian equity markets have done well in the calendar year 2012, notching up gains of over 20% year-to-date. On the fixed income side, yields have softened but only mildly, with the 10-year trading at 8.15% versus that of 8.25% in the beginning of the year. Fixed income yields had declined in the latter half of 2011 from 9% levels, but post that yields have been more or less stagnant in the absence of anticipated rate-cuts by RBI.
Going forward, we are bullish on Indian equities owing to multiple catalysts. Firstly, central bank and government action at the global level has reduced tail risks to a certain extent. ECBís strong action in the form of Outright Monetary Transactions (OMTs), enabling purchase of sovereign bonds of debt-trapped Euro-zone countries, has reigned in the fear of a euro breakdown. Further, this has helped restore confidence in the euro, with sovereign yields receding materially despite a lack of improvement on the economic front. Spanish and