It has been only a few days since the Union Budget 2022 was presented. As we know this budget focuses on investment-led growth with higher expenditure on capital expenditure. Usually, after every budget, there is little noise about where to invest or what necessary changes to make in your existing investments. It is therefore important to remember that our approach to investing should always be based on our individual goals and our long-term view of the asset class. The Union Budget only gives an indication of the fundamentals of the economy. Basing our entire investment decisions on budget will only risk our portfolio strategy. Therefore, asset allocation should be your starting point.
Decide on Asset Allocation
Broadly speaking, there are two things to consider while deciding on asset allocation. First of all, you have to decide the time frame of your investment. The longer your time frame, the higher your allocation to equities can be. Then you need to figure out the maximum temporary drawdown that you can place in your equity portfolio. Remember, there is a 10-20% drop almost every year and a big 30-60% drop every 7 to 10 years.
If you can handle a higher temporary drop, your equity allocation may be higher. If not, the equity allocation should be low and accordingly your portfolio return expectation should also be low. Based on this trade-off, you can arrive at your ideal asset allocation between equity and fixed income.
set up equity investments
We remain positive on Indian equities over a time frame of 5-7 years. This outlook is driven by our expectations for a strong earnings growth environment over the next few years. The Union Budget has put development at the fore and this gives more credence to the above approach. The multiplier effect (a multi-sector impact) due to higher capital expenditures scheduled for FY23 may support earnings growth in the coming years, which is positive for equity markets.
How to invest equity?
We prefer a diversified approach to investing in the equity portion (as per the original asset allocation). This can be achieved by investing equally in five different styles – Quality, GARP (Growth at Fair Value), Value, Mid and Small and Global Funds. This holistic approach can help you achieve better performance over a period of more than 5 years with significantly less volatility.
Deciding on Your Fixed Income Investments
Even before the Budget, we were in an environment of rising yields. The rate cut cycle was behind us and we expected a gradual pick-up in yields over the next 12-18 months. Now, the fiscal deficit (6.4% of GDP) and net market borrowing (Rs 11 trillion) figures in the Budget have turned out to be much higher than the bond markets for FY23.
Therefore, bond markets may remain volatile in the short term in the backdrop of high inflation, high supply of government bonds and exit from loose monetary policy prevailing globally.
How to make fixed income investments?
We prefer funds with high credit quality, in which at least 80% of the portfolio should be invested in AAA-rated papers with a short revision period (one year or less). Such funds are better suited for a ‘rising yield’ environment, as they are less volatile when yields rise. They quickly reset to higher yields, increasing potential returns.