Amid COVID-19 led uncertainty, Indian markets are witnessing periods of volatility and are expected to further retracements and pullbacks. Those taking the fixed income route of investments are also suffering the loss in purchasing power of their money as inflation continues to find new highs.
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The following are some options that investors could consider during this phase which have been enumerated below:
Blue-chip stocks
Though equities tend to be volatile, blue-chip stocks or basically large cap companies are deemed to carry the lowest risk among equities. Equity investment is necessary to beat inflation in the long run and to accumulate wealth over time. Some of the blue chip stocks recommended for investment in India have been from the top 50 stocks of the index. These stocks have a long history of existence as well as success and are mostly leaders in their respective sectors. Though there is no certainty with these blue-chip stocks but these at worst may stagnate rather than decline in value. Furthermore, these blue chips are consistent in paying dividends and in fact both the value as well as dividend for these stocks tend to rise.
Exchange traded funds (ETF)
These are mutual funds that are traded on exchanges. One can go for bond or equity as the underlying in the ETF, and for the low-risk ETF, one can opt for ETF’s that track an index of a precisely low-risk asset such as AAA-rated corporate bonds, treasury etc. Also, these ETF’s are economical and importantly provide exposure to a variety of securities.
Mutual Funds
These are another investment vehicle for investors. Investing in pharma sector mutual funds can especially prove to be advantageous amidst the pandemic, as governments are likely to increase spending on healthcare. While like all other investment options, mutual funds have also taken quite a hit, Nifty and Sensex Index-based mutual funds are expected to bounce back stronger once the economic recovery starts.
Government bonds
In its February Monetary Policy Committee, the government said it would allow retail investors to directly invest in government bonds by opening gilt accounts with it. Currently, the return on 10-year benchmark bond is 6.03 percent.
This yield is based on the government's borrowing programme as well as RBI's monetary policy outlook. Such instruments are safe as they are backed by the Government of India. This instrument is like a loan an investor provides to the Indian government. Subscribing to the bond, the government guarantees you payment of coupon rate or interest rate.
Government of India (Taxable) Savings Bonds
These bonds were first available for sale from July 1, 2020 and offer floating rate interest tied to the National Savings Certificate. Currently, the rate is 7.15% and it is revised every six months based on the NSC rate. For these bonds, there is no cumulative interest pay out option. These bonds can be purchased at designated branches of banks including SBI, HDFC Bank, ICICI Bank, Axis Bank and others.
AAA Rated Corporate Bond Funds
These corporate bond funds as per SEBI guidelines need to invest at least 80 percent of the corpus in AAA and above rated corporate bonds. Now some of the benefits of making the allocation in these funds are less credit risk owing to investment in AAA-rated corporate. Also, these corporate bond funds offer a higher rate of return in comparison to bond funds. They also offer a higher return and are more tax-efficient for those in the higher tax bracket with investment horizons exceeding 3 years.
The AAA rating is the highest rating a company and its debt can be accorded. Companies rated AAA by credit rating agencies have been judged to have an extremely high capacity to meet their financial obligations - so they are unlikely to default on the bond's interest payments or fail to repay the principal amount. AAA-rated corporate bonds are considered only slightly riskier than government bonds.
Gold
This is another vehicle that has been used for investment purpose for years in India. According to the World Gold Council (WGC), the uncertain market scenario in this pandemic, as well as the positive price momentum of gold, might lead to positive trends for this investment option in the future. Gold had quite a commendable performance in the first half of 2020, and increased by 16.8% in terms of US dollars, and considerably outperformed many other major asset classes. As the effectiveness of gold as a hedge can aid in mitigating the risks associated with equity volatility, investors have started considering gold as a good option for part of their bond exposure.
All these different options are available to Indian investors during this time of financial uncertainty. An investor though must compare the investment vehicle’s benefits with its disadvantages before making an investment decision, with a view of the investment’s potential to grow in the future.
The author, S Ravi is Former Chairman of Bombay Stock Exchange and Founder and Managing Partner of Ravi Rajan & Co. The views expressed are personal
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