The most popular asset class in India, even today remains debt. With the increase in bank interest rates in recent times, the traditional avenue of Bank Fixed Deposits has witnessed a revival of sorts and fixed income investors have rushed in to lock in high interest yielding deposits for longer tenures.
There is also concern among these investors that at some point, interest rate cuts will commence and trigger a sharp fall in bank interest rates. That bank interest rates are a function of the inflation rate and it is important always to look at interest rates as net of inflation is often missed by investors.
Debt mutual funds whose USP was its tax arbitrage over its alternatives took a hard blow in the last Union Budget which withdrew its tax advantage. Simply put, the mutual fund industry will need to re-calibrate to make their debt mutual fund holdings more palatable to investors. Even the insurance industry took a beating in the earlier Budget when its tax free tag for premium payments in excess of R2.5 lakh, was withdrawn. There is also a plethora of traditional savings offerings from the government, albeit with investment caps which still remain popular among investors.
Yet another popular sub-asset class in India especially, is Gold. With gold prices rising to new highs, there are concerns of it entering a price bubble territory. However, the ongoing hostilities in some parts of the world as well as aggressive posturing by nations with powerful armies, ensures that gold as the asset class of last recourse remains in demand.
There is still some smart money accumulating the yellow metal in its more liquid investment forms via Exchange Traded Funds (ETFs) as well as the mutual fund route. It continues to remain a hedge alongside large equity holdings to cushion portfolios in the event of a vertical fall in equities. Though non-traditional, an emerging asset class that many young people are gravitating towards is Cryptocurrencies. While I don’t claim expertise in cryptocurrencies, its acceptance as legal tender in some parts of the world suggests that the concept could grow, subject to regulatory approval. Given its extreme volatility though, tread carefully till then.
The highest profile, even if somewhat minimally invested, traditional asset class in India remains Equity. The general consensus or shall we say apprehension is that a correction is round the corner. It may be so and those who believe it would do well to seek a switch to either safer debt instruments or equity offerings carrying lower risk by employing an inbuilt hedge mechanism.
One can of course, also always take the view that historically most corrections have almost inevitably been followed by a rebound and hence, if one has no pressing near term need for the invested funds, stay invested.