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WEALTH CREATION: Five investment options for these turbulent times

Index funds should be the bedrock of your investment portfolio

WEALTH CREATION: Five investment options for these turbulent times
Target maturity funds can form the majority of your debt allocation

By Varun Fatehpuria

The Indian stock market stayed reasonably resilient in 2022 despite the turbulence in the global equity markets like US and Europe. Nifty50 and Sensex were up 4%, while the S&P500 and MSCI Europe indices were down a massive 19.4% and 14.5%, respectively. Aggressive rate hikes, soaring inflation and the energy crisis due to the Russia-Ukraine war weighed heavily on the western markets. India was somewhat of a calm oasis amidst all this.

However, that doesn’t mean that we can remain insulated from what is happening in other parts of the world for a long time. Sooner or later, the ripple effects of those events will be felt in some form or the other. While extended periods of a bull market may entice you to take riskier investment decisions, it is always prudent to adopt a cautious approach. If you are considering investing in today’s environment, here are some of the options for you:

Low-cost, passive ETFs or index funds

It has become increasingly difficult for fund managers tracking the large-cap space to beat the market. The limited investible universe of 100 companies, combined with the fact that almost all of them tend to be very well-researched by analysts, leaves little possibility of generating outsized returns. The low-cost nature of index funds therefore enables you to keep more of the returns. Ideally, these funds should be the bedrock of your investment portfolio, and you can consider allocating 15-20% of your equity allocation to them.

Value/dividend yield funds

The rising interest rate environment has suddenly made investing in value/dividend stocks, i.e., shares with a low P/E ratio or a high dividend yield, attractive. These funds typically invest in the large-cap space, so there could be some overlap with the index funds.

Small-cap funds

Small-cap space remains popular due to its ability to generate high returns over the long term. However, they can also be highly volatile in the short-term, i.e. 1-2 years. Therefore, add such funds to your portfolio if you are investing long-term and can withstand the ups and downs.Keep the exposure between 10-12% depending on your risk appetite.

International funds

Having an allocation to the US markets is good from a diversification point of view. The Indian markets are lowly correlated to their counterparts in the West.If executed correctly, international investing allows you to invest in opportunities not available in India.

Target maturity debt funds

Target Maturity Funds are debt funds that primarily invest in G-Secs, SDLs, and PSU Bonds with a fixed maturity. Since these funds hold the bonds till their maturity, one has a higher visibility on the returns generated by them. These funds are perfect for investors looking for the predictability of a fixed deposit along with the tax efficiency of a debt mutual fund. TMFs can form the majority of your fixed income/debt allocation.

As always, do not just chase the past performance of any investment or invest randomly based on what your friends and family are investing in. Instead, consider your age, risk appetite and time horizon to ascertain the appropriate asset allocation and act accordingly.

The writer is founder & CEO, Daulat

the right mix

n High-interest rates and depressing technology valuations have increased the appeal of value/ dividend yield funds
n Small-cap space remains popular due to its ability to generate high returns over the long term
n Target maturity funds can form the majority of your debt allocation

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First published on: 25-01-2023 at 04:52 IST