For the best part of this decade, equity has been the asset class of choice for most investors. The five-year bull run that took the benchmark index of the Bombay Stock Exchange up sevenfold also added to the craving for stock. But now, as a volatile market has taken more than a third off the Sensex’s all-time peak of 21,206.77 recorded in January, investors are looking for instruments that are secure and at the same time provide returns that beat inflation.
“Yes, times like these make one look at alternatives though asset allocation should be an all-weather friend,” says Lovaii Navlakhi, managing director of International Money Matters, a wealth management firm.
The benefit of having a mixed basket, typically, is that it provides a buffer in times of downturn, where a dip in one asset is balanced by a rise in another. For instance, in the last few months, equity mutual funds would have given negative returns of 30-35%, but those from some international funds, which invest in stocks listed abroad, as well as gold funds, were positive.
However, most alternative assets require a large outlay, the reason investment advisers recommend investors consider them only once they have built up a primary portfolio of more than Rs1.5 crore. “The alternate asset classes are more suitable for high net worth individuals, considering the high-risk and high-return characteristics of some of these asset classes,” says Samir Bimal, country head of private banking, ING Vysya Bank.
Therefore, the challenge for investors is to pick the assets that match individual risk profiles and to know how many such assets they need. “Even if you can come up with a dozen different categories of what you term as alternative, it is doubtful you need more than two or three in your portfolio, and even that may be too many,” says Roger Nusbaum, a US-based investment adviser, in an article posted on Seekingalpha.com, a website that provides wealth management information.
In fact, informed investors have always sought out diversification. The World Wealth Report for Asia Pacific by Cap Gemini and Merrill Lynch indicates that even in the midst of the bull run, high net worth individuals in India were allocating nearly 20% of investable funds in alternative assets apart from real estate, which took 17%. “Efficient allocation is another important aspect of investments if investors want to ensure they maximize return on investment,” says S. Naren, chief investment officer (equity), ICICI Prudential Asset Management Co.
Structured funds or capital protection funds
Structured products include equity-linked debentures and other capital guarantee products that are structured by financial institutions to provide investors with growth as well as protection of the initial capital invested. In the Indian market, structured products are being offered by banks such as Citibank, Hongkong and Shanghai Banking Corp., ICICI Bank Ltd and HDFC Bank Ltd as well as by brokerage firms such as Edelweiss Capital Ltd. The minimum investment for a structured product can range from Rs10 lakh to Rs20 lakh. And for those who are interested in parking money there, Crisil Ltd offers a rating system for more than 35 such products that are available in the Indian market.
“That the product can be structured based on our views on the market, sectors and stocks is a big advantage,” says Bimal of ING Vysya Bank. Most such products available are based on two models. In the constant proportion portfolio insurance model, the proportion of assets to be kept in stocks is decided by a multiplier, which is fixed. It means that if you invest Rs100, the multiplier can fix the debt portion at Rs78, with the balance in equity. This ratio will remain constant for the entire tenure, which is 18-30 months. In the dynamic portfolio insurance model, the multiplier is open to change and therefore, the proportion of assets also changes. The disadvantage with structured products: “If the fund fails to perform, money invested remains idle although there is no depreciation in capital,” says Lovaii Navlakhi of International Money Matters.
In India, investors place most of their savings in domestic stocks and India-specific equity funds. In times of volatility, there is a compelling case for such investors to diversify across asset classes and geographies. “You earn in this economy, your pensions are in this economy, and your investments are also in the same economy—the risk of concentration is too high,” says Vineet K. Vohra, managing director and chief executive, ING Investment Management India. In an environment where the economy and capital markets are increasingly influenced by global forces, investors need to balance the risk of being overly dependent on Indian markets with appropriate global diversifiers. “There is an opportunity to invest up to $100,000 (Rs42.8 lakh) in overseas investments; Indians should take advantage of that,” says Vivek Kanwar, general manager (retail liabilities) and head of global private client (domestic), ICICI Bank. Investment advisers typically recommend overseas investment as a de-risking strategy for those with an investable surplus of more than Rs1 crore, although the minimum investment required for such investments, when routed through mutual funds, can be as low as Rs10,000. About 20 funds that invest exclusively in overseas assets have been launched in India last year.
Investors with a net worth of more than Rs1 crore can look at investing in art either in its physical form—where, for instance, investments are made directly in a painting—or in paper form, through investments in art funds that are run by experts . However, according to investment advisers, as the art market is still unregulated, investors should place no more than 3–5% of their net worth in this asset class. “Investors have to make a minimum entry-level investment of between Rs3 lakh and Rs5 lakh; therefore, a net worth of Rs1 crore becomes the entry barrier,” says Navlakhi. Art funds, such as the Indian Fine Art Fund and those run by Osian’s and Crayon Capital, have a lock-in period of three-five years. Also, art can be an illiquid investment—there is no guarantee that you will be able to sell a painting when you want to or get the price you want. Even someone with a net worth of Rs5 crore may not be advised to invest in art if his portfolio at the same time has a very high concentration of real estate, another illiquid asset class.
Gold and other Commodities
The negative correlation to capital markets makes gold an attractive balancing option, as every time the equity markets dip, gold appreciates. It, therefore, helps investors insulate their portfolio against risks such as global uncertainties, inflation and currency fluctuations. This trend in gold prices has helped exchange traded funds (ETFs) that invest in gold offer good returns in recent times—gold ETFs have given a return of almost 16% this year. And, external indicators such as a rise in oil prices and high inflation are expected to keep gold prices on a high in the medium term.
Investment advisers are recommending a 10% allocation in portfolios for gold ETFs. “Gold is a safe investment as it can definitely beat inflation, with the only risk being an appreciating rupee,” says Kanwar of ICICI Bank. He says the yellow metal is a great investment as it offers three different options—buying physical gold, investing in stocks of mining companies or in ETFs. Another option is to place money in natural resources such as coal, iron ore and metals—they offer good returns on investments with a three-to five-year horizon. The stocks of top natural resources firms are cheap, based on their earnings due to the perception that commodity prices go up and down at regular intervals, says Bimal of ING Vysya. However, the indicators of rising crude prices and inflation as well as a weakening dollar indicate a greater interest in gold for the time being.
Investing in private equity or in as yet unlisted companies offers high return potential and the advantage of participating in emerging opportunities. The downside is that new businesses can be risky and if they fail, the equity investment or debt made available to such businesses can be lost.
“Private equity or early-stage investing is an option only for long-term investors who are not averse to higher risk and have the sustainability to remain invested for five years or more,” says Waqar Naqvi, chief executive, Taurus Mutual Fund.
Even without the markets being choppy, this asset class is a must in every portfolio. This does not include the house that one lives in, as such an asset is not considered part of an investable portfolio. Beyond that, investors must invest in real estate for capital appreciation, with choices spread across owning actual physical real estate—residential or commercial—or investing in real estate funds, according to investment advisers who recommend 15–20% of the portfolio in real estate investments. “For the purposes of diversification, real estate as an asset class is looking fairly valued post the recent correction,” says Bimal, who says it provides an opportunity for investors seeking wealth creation over the longer term.
Over the past three years, a host of financial institutions have offered portfolio management options to high net worth clients, termed real estate portfolio management schemes or real estate venture funds, with a minimum investment requirement of Rs25 lakh. These schemes, registered with market regulator Securities and Exchange Board of India, are privately managed and invest in underdeveloped properties, where profits after development are shared by all investors. Typically, these are high-risk, high-return schemes where capital appreciation is the primary driver for investments.
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