Middle Path To Earning Better Returns

A little risk, distributed between bonds, equity & gold, can fetch you higher returns than just playing safe with FDs
Partha Sinha | TNN


As an investor, as you learn about investments, you go up the ladder of risk profiles, from low to medium to high. This would apply when you sit with your financial advisor or financial planner to build your portfolio.
Last week we told you about low-risk investment options and some of the dos and don’ts related to it. This week, we will take you through a similar tour but here the risks are slightly higher, that is chances of losing your money are higher, but at the same time your chances of having a better return than in low-risk investments are also higher.
Before we begin, the question you should ask is how will one tell if a portfolio carries medium risk? Usually a portfolio in which say about 25-40% of the corpus is invested in low-risk bonds, like government and ‘AAA’ rated ones, and the balance is invested in equities could be considered a portfolio with medium risks. However, this is not a strict classification and could differ from person to person, and also how your financial advisor plans your portfolio.
An investor who want a good return from her portfolio but is not ready to put too much at stake, medium-risk investments are the ones for her. Seen individually, bonds issued by corporates that have high ratings (but not the highest ratings), some balanced schemes of mutual funds and even stocks of large and reputed companies that are in stable businesses like fast moving consumer goods
(FMCG), are considered mediumrisk investments.
Balanced funds, however, are one of the best examples of moderate risk investment instruments which are available in the market today. As the name suggests, a balanced fund by its very nature aims to have a balance in its risk profile. Usually, these funds invest between 25% and 40% in debt instruments which carry lower risks. The balance is usually invested in stocks of frontline companies. There are some balanced funds which also have the mandate to invest in small and medium cap stocks. But it is important to remember that more exposure a balanced fund has in small and medium cap stocks, more risk is it taking with your money.
So while deciding to invest in a balanced funds, it is very important to look at its fund allocation structure. Once you know the fund allocation structure, sit along with your financial planner and find out if the risk that the fund manager would take with your money is aligned to the kind of risks you are willing to take. In case you find that the risks in such balanced funds are higher than what you can afford to, it is advisable to look for other balanced funds with lower risk profile.
One of the advantages of a balanced fund is that rather than you deciding to invest in one equity fund and another debt fund, you can combine the two to invest in a balanced fund. (The other medium risks MF investment options like MIPs, gold ETFs, etc are explained in detail in another article on this page.)
Bonds of stable companies that give high rate of interest are also considered moderate risk investments. These bonds do not carry the highest ‘AAA’ rating, but definitely have rating which is investment grade. Since these companies are rated slightly lower than the highest grade, they have to pay slightly higher interest than the ones which have ‘AAA’ rating. In terms of rating, as we come down from the ‘AAA’ rated bonds to ones with lower ratings, risks associated with such instruments also rise. So if one invests in bonds rated at least ‘BB’, such bonds are considered to have moderate risks. Some financial advisors also consider real estate investments as moderate risk investments. According to them, prices of real estates are sticky at the downside. Which means the rate of rise of real estate prices is much higher than the rate of fall of its prices, especially for residential properties. Although in recent times there were sharp drops in real estate prices, but such drops were limited to some of the big cities only. Outside the metros and some select big cities, the volatility in real estate prices is much lower, qualifying them as medium risk investments. And if you have an investment horizon of 10-15 years, and if the property is clean and in a good location, there is every chance your will get good appreciation on your investments.
However, a word of caution here: Real estate investments are not a very liquid investment. This means you cannot sell off your property quickly enough to get money in your bank account if you need it urgently. Usually, it takes more than two months to dispose of a real estate investment. Compared to this, you can sell gold within hours, while if you sell shares, you can get money in your account two working days after the day of trade. In mutual funds too, it does not take more than two days to get the money into your account.
Also, real estate investments need continuous expenditure: You need to pay your property tax and spend on regular maintenance to ensure that your property appreciates in value.
Gold is another investment option that is considered to a moderate risk option when the investment has a horizon of more than 10 years. Although recently the price of yellow metal has witnessed substantial volatility, if one looks at it over the last decade, the major appreciation in its price has come post 2008. Consider this: in eight years, between January 2001 and December 2008, the price of gold rose 2.3 times. But when we look at the rise in its price between 2001 and now, the rise is six times. Considered over a decade or more, gold is a safe investment, a hedge against inflation and bad economic situation. So when you build your moderate risk portfolio, you should consider having a flavour of gold in you portfolio.
A word of caution here: Holding physical gold is expensive and risky. So given the current developments in technology and offerings of investment products in electronic forms, when you are buying gold for investment purpose, you should consider holding it in electronic form. At present, spot exchanges offer holding of gold in electronic form and your financial advisor should be able to guide to the same.


Partha Sinha | TNN