Your investment guide for 2021 and what to expect from Budget

The year 2020 was extraordinary, and events swung sharply from dismay to delight for investors. The stock markets crashed almost 40% in March on Covid fears, but recovered smartly only to end the year at an all-time high level. Interest rates declined during the year, bringing down the returns for FD investors but pushing up the returns of debt funds. Amidst the uncertainty, gold continued to do well, rising 31% during the year to emerge as the best performing asset class in 2020.

Impact on investor’s portfolio
The differential returns earned by various investments alters the asset allocation of a portfolio. The equity allocation of an investor who started 2020 with 50% in equities, 40% in fixed income and 10% in gold would not have changed too much if he didn’t add more to equities when markets fell. If he did, the equity portion would now be more than 50%, which call for a rebalancing of the portfolio. Rebalancing restores the original asset allocation, thereby reducing the risk in the portfolio.


Similarly, gold churned out stellar returns during the year and the prospects look bright due to the global uncertainty caused by Covid. But if the allocation to gold in the portfolio has risen by more than 3-4 percentage points, it may be time to book profits. Or at least don’t invest more in the yellow metal now.

How investments did in 2020

Investment class/option	% returns in 2020
Gold	31%
Sensex	14.5%
Equity funds	14.2%
Debt funds	8.5%
Fixed deposits	6%
Real estate	2-3%

Data as on 30 Dec

Beware! Even debt funds and FDs can be risky
The past few years have shown how debt funds can also be risky and why you can no longer invest in bank deposits with your eyes closed. Investors must avoid debt funds that venture into low-grade bonds just to improve the returns. The Franklin Templeton episode, where an estimated Rs 28,000 crore of investor money is stuck due to the poor investment choices of fund managers, underlines the risk of running after high yields. Stick to funds that hold good quality paper, even if that means slightly lower returns.

Similarly, investors should not get tempted by the higher rates offered by small and obscure banks. The crisis at PMC Bank, Yes Bank and Lakshmi Vilas Bank are all examples where the high NPAs cast a shadow over the viability of the bank. Look up the financial position of the bank before you invest your money. Invest only if the net NPAs are below the acceptable threshold of 4-5% and the bank has a solid capital adequacy ratio of more than 9-10%.

Is it a good time to buy a house?
Real estate has been down in the dumps for many years, and Covid only worsened the situation. To clear monumental unsold inventories, cash-strapped builders are currently offering attractive discounts. Additionally, Home Loan interest rates are at decadal lows, starting @6.75%. Therefore, best time to buy a house.

Whereas acquisition of real estate for self use is strongly recommended, purchase for investment purposes is not such a good idea. For sure, do plan to go purchase your dream home or commercial property, keeping in mind that you will be the occupier. Given the unexciting economic outlook, cannot expect generous returns for rent or any significant value appreciation. Therefore, best to buy for self-use only.

Are you adequately covered?
Before Covid struck, not everybody took health insurance seriously – mostly people bought a basic cover. Enormous hospitalisation bills of many Covid patients has shown that a Rs 4-5 lakh health cover won’t be enough. A family of four needs a higher cover of at least Rs 10-15 lakh. A top-up policy is a low-cost way to enhance your health cover without having to buy a new one.

It is also time to reassess one’s life insurance cover. The life cover should be adequate to square all outstanding debts, and to also generate enough returns to replace the income of the insured person. Low-cost pure protection term plans are perhaps the best option to cover for life insurance. At least 5-6 times one’s annual income is recommended.

Awaiting FM Nirmala Sitharaman’s budget
As we enter 2021, all eyes are on Finance Minister Nirmala Sitharaman’s forthcoming budget. The equity markets are at all-time high levels and valuations are elevated. Though the continued inflow of FII investments is keeping them buoyant, even a hint of negative news at this stage can trigger a downtrend. Investors should be realistic and take some profits off the table at this stage.

On the other hand, a positive signal in the budget can take the markets to even greater heights. A few measures could improve investor sentiment, including the 10% tax on long-term capital gains beyond Rs 1 lakh. If the budget hikes the tax-free threshold to Rs 2-3 lakh or completely removes the tax on long-term capital gains from equities, it will be a positive for small investors. The removal of tax on dividends will also help improve sentiment.