Gold, equity or debt? Here’s how retail investors should plan their investment portfolio for 2021 

By R Venkataraman

As we approach the end of a somewhat difficult year, the common question running in investors mind is where to invest in 2021. I have always insisted that it is your financial goals, investment objectives and risk profile that are key factors for making an investment decision and arriving at your strategic asset allocation. Here is my outlook for the three common asset classes for 2021.  

Debt investments: In CY2020, RBI reduced the repo rate by 115 bps to 4%. As interest rates fall, bond prices rise and so debt mutual fund investments across the spectrum benefited. Long-dated bonds like gilt, long duration and dynamic bond funds delivered on an average 15% returns, even medium to short term bond funds, corporate and banking PSU debt funds, delivered double-digit returns. 

Having the same expectations for CY2021, however, may lead to disappointment. This is because interest rate cycle has seemed to bottomed out and scope for further rate cuts is less because of rising inflation and higher government borrowing. In such a scenario it makes sense to gradually book profits from mutual funds holding long-dated bonds like gilt and long duration funds.

Though interest rates may not fall further, they are not expected to rise any time soon either. Investors may look at corporate FDs and secondary market bonds for chasing slightly higher returns (currently 6% to 7% p.a for AAA-rated FDs & bonds). However, such investors also need to consider the credit risk involved and should not go overboard. 7.15% RBI bond is another investment offering similar returns. Regular income instruments like Senior Citizen Saving Schemes, Post Office MIS currently offers 7.4% p.a & 6.6% p.a taxable interest respectively.

However, it is Sukanya Samriddhi Scheme, PPF & for employed – EPF offering tax-free returns of 7.6%, 7.1% & 8.5% that would score higher than most of above investments on parameters of safety, returns & tax efficiency, but the catch here is liquidity. For more liquid part of the debt portfolio, consider ultra-short-term and low duration mutual funds. 

Equity Investments: Since March lows, Indian indices are up by about 80%, driven by liquidity and low-interest rates. Liquidity, on account of massive fiscal stimulus by governments all over the world and monetary stimulus by global central banks has found its way to emerging markets. After initial gains in the indices led by safety sectors such as IT, Pharma and to some extent chemicals, telecom and FMCG and large-cap quality names such as reliance, now economy-related sectors have started participating in the rally as a vaccine is just around the corner and expected economic recovery. Banks the biggest beneficiaries of economic recovery, consumer discretionary, cyclicals, industrials and energy will do well. This trend is expected to continue in CY 2021 where you may see profit booking in defensives and money moving towards more economy-related themes.

Overall sectoral rotation that we have seen so far will continue into CY2021. In such a scenario multicap or flexi cap mutual funds that have the flexibility to invest across market cap & sectors can be good option for retail investors to take exposure to equity as rally gets more broad-based.

Value investing is another theme which would play out in the beginning of the coming year. Interest Is already seen in PSU space in this regard and couple of large AMCs have also raised money through NFOs of value funds to ride this theme.

Small and Mid-caps may very well make a comeback in CY 2021 as is also evident from their recent outperformance. They have severely underperformed large-cap indices since 2017, as the economy was in a mess even before pandemic & investors were staying away from them. Beaten down quality small caps available at good valuation compared to large caps sets up the stage for their comeback in CY 2021. 

Gold Investments: As a standard asset allocation, 10% to 12% of the portfolio is usually kept in gold as a hedge against riskier investments. Sovereign Gold bonds give 2.5% returns over and above gold price appreciation at the same time long term capital gains is exempt on maturity and hence is best way to take exposure to gold compared to any other physical, electronic or paper mode of holding gold.

Gold can provide a hedge, debt can provide safety, stability and liquidity.  With equity, retail investors should follow the mutual fund SIP route or invest in direct equity only with advise from qualified professional advisors.

(R Venkataraman is the Managing Director, IIFL Securities Ltd. The views expressed are the author’s own. Please consult your investment advisor before investing.)