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
Business Line: Vidya Bala
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.
(The views expressed above are the personal views of the author)
