Consider taking advantage of volatility

The majority of financial advisers are afraid to lower their customers’ expectations for returns. It makes sense in the Indian setting. Most middle-class customers would remark, “I am investing Rs 600,000 a year in 4 PPF accounts, and Rs 200,000 in NPS so my debt appetite is already met,” if you inform them he will get 8% in a debt fund. on the same way, even during FA meetings, the FA who claims a “10–12% return in equity” would be laughed at! It seems as if the financial advisor believes that a client’s results are determined by what the advisor says!

The return outlook over the next ten years is not good in the US. Columnist Jason Zweig says that when investing in companies, he looks at predicted profits growth as well as dividend yield. Over the next ten years, he predicts earnings growth to be around 5%. For example, a 60% equity/40% bond portfolio would provide around 4.5% return; more cautious portfolio mixes would yield even lower returns.

Let’s use this in an Indian context. Although the Sensex now has a 1.5% dividend yield and 9% expected profits growth, our market-to-PE ratio is high at the moment. Since I’m not aware what the mutual fund portfolio’s PE is, I’ll leave it at that. This means that the expected return on equity is around 10.5%. Current bond rates for the 10-year G-sec are around 7.5%, while premium corporate bonds have yields of roughly 9% annually. After deducting spending, the projected equity and debt amounts are a quite meager 9.5% and 8%, respectively.

Contrary to what I have experienced, safety, caution, and diversity are much preferable than fortune telling. I might be very, very wrong, so don’t take these statistics as gospel for a whole ten years.

It’s also quite stupid to say, “such low returns,” therefore I won’t invest at all, as storing your money under your mattress doesn’t help either. Because cash has shown to be a horrible asset, PPF and NPS returns should decline.

It’s important to consider your asset allocation and take advantage of volatility; it won’t damage you as much to join the equities market a bit too early or to remain in it a little too long after the party ends as it would to not go at all.

A low-cost bond fund will partake in a portion of the return on portfolio value that a PPF or bank fixed deposit would not.

Both SIPs in debt and equity funds are available; keep in mind that PPFs are excellent investments only if you are already looking to protect yourself against inflation via stocks. Multi-Asset Allocation and Balanced funds are more tax-efficient.

Your portfolio and your fund requirements are dynamic, so if you need money during a stock boom, your asset allocation may alter since, in the case of a retiree portfolio, your drawdown may come from equities rather than debt.

Starting with modest expectations has the benefit of allowing you to wait for the “regression to the mean,” which may not occur at all during your investment term, in the event that you finish up with a larger return. Your risk profile, net worth, and other factors would have changed in ten years, and your portfolio would have too!

PV Subramanyam

She writes at www.subramoney.com and is the author of the #1 book, “Retire”