A year of strong equity returns; build a well-diversified portfolio

  • Gold delivered double-digit returns in 2023; experts expect debt to catch up in the year ahead

Jash Kriplani
Updated28 Dec 2023, 10:54 AM IST
Gold has delivered over 12% returns in year-to-date.
Gold has delivered over 12% returns in year-to-date.

Returns from investment are the best indicator of the performance of various asset classes. And that helps investors determine which asset class is a winner and which ones to avoid. While the winners among asset classes keep rotating every year, the absence of any such pattern over the last 10 years (see chart), reinforces the importance of asset allocation in building a balanced portfolio. Here’s a quick look at the performance of different asset classes in 2023.

Indian equities: going strong

After a lacklustre performance in 2022, domestic equities were back with a bang in 2023. The S&P BSE SmallCap Index is up 45% year-to-date (as of 27 December). The S&P BSE MidCap Index was up 42%. International equities also did well, with the S&P 500 Index delivering 25% returns in rupee terms. The S&P BSE Sensex, which is seen a barometer for Indian market, was up 18%.

Experts remain positive on Indian equity markets. “I am positive on the large-cap side. In terms of historical returns, we are not even at the trendline. In terms of valuations, we are not at the highest end. But I would say, investors need to be very cautious on the small-caps. A lot of new investors are entering the market and might get carried away by the returns being seen in the small-cap stocks,” says Dubai-based Devina Mehra, founder of First Global group.

While equity is often seen as an important asset class for beating inflation in the long run, the historical pattern of returns show that equity investments come with a lot more volatility than other asset classes.

Real estate: returns lag

As per the Reserve Bank of India’s (RBI) housing price index, prices of houses have gone up by just 2% in 2023. This is despite strong sales and demand seen in the real estate market in this year. The RBI releases quarterly housing price index data based on transaction-level data received from the registration authorities in 10 major cities. These cities include Ahmedabad, Bengaluru, Chennai, Delhi, Jaipur, Kanpur, Kochi, Kolkata, Lucknow, and Mumbai.

“The Indian residential segment remained unstoppable in 2023. If we consider the trends in the first nine months of 2023, housing sales reached a new peak and were all-time high. To put in numbers, as per Anarock Research, 9MCY23 saw total housing sales of over 3.49 lakh units across the top 7 cities which is 96% of the total sales recorded in entire 2022,” said Anuj Puri, chairman of AnarockGroup.

“In 2024, we may see up to 12% increase in average prices across cities, if the current momentum continues,” he added.

Gold: going steady

Gold again had a strong year. It has delivered over 12% returns in year-to-date. “The precious metal saw a large upmove at the start of the year in response to stress in the US banking system which triggered global risk aversion and expectations of a Fed pivot. But over the next few months, sticky US inflation and strong labour market data fuelled the US Fed’s hawkish stance, pushing gold prices lower. Fresh geopolitical tensions in the Middle East, concerns around inflation and concerns about a US economic slowdown in the last few months of the year brought with them renewed expectations of peak interest rates and softer monetary policy, pushing gold prices higher,” said Chirag Mehta, chief investment officer at Quantum AMC.

Gold can continue to be a good diversification option even in 2024. “As interest rates peak and the timing and extent of rate cuts remain uncertain, it can provide opportunity for markets to speculate, creating volatility across asset markets, including gold. Markets can oscillate between optimism and pessimism creating wild short-lived swings in gold prices on either side. Investors can use these swings wisely to build their allocation to gold which can benefit from the eventual turn in US Fed policy, that is now a given at some point next year,” Mehta added.

Debt: better days ahead?

After a difficult period last year, experts expect better returns from debt markets in the coming year. “Compared to last three-four years, this new year is starting on the most promising note. The rates have already been hiked and the view largely is that interest rates will remain stable or go lower from hereon,” said Mahedra Kumar Jajoo, chief investment officer-fixed income, Mirae Mutual Fund. “What stood out in 2023 was that things turned out far more benign than what was expected at the beginning of the year. There was no major economic slowdown or market crash. On the other hand, markets held up well and saw through a difficult phase,” he added.

According to Jajoo, credit should also be given to Reserve Bank of India for its monetary policy management in keeping domestic bond yields largely stable, despite volatility in global bond markets.

Asset allocation

As our study shows, different asset classes tend to do well in different phases of the markets. Thus, investors should build a well-diversified portfolio, wherein investments are allocated to various asset classes, as per their risk-return appetite.

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First Published:28 Dec 2023, 10:54 AM IST
HomeMoneyA year of strong equity returns; build a well-diversified portfolio

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