Given the current political and economic uncertainty in India, equity markets have fallen significantly from their January highs – with almost all sectors in the red. Some sectors have fallen as much as 50% since then. As investors, have rushed towards debt, rising yields and rising inflation have taken a toll there as well – no debt investment gives you even the inflation rate today. While there is really no option but debt for the really risk-averse investor, there are still some interesting options for a slightly more willing one. Let us look at some of them – of course, you need to do a lot more research and analysis before actually investing in them.
Structured Products
Structured products such as capital protection schemes are a great way to protect downside risk, while still being able to participate in the equity market. While this was traditionally only an HNI product, now the minimum investment cut-offs for such products have come down significantly. Mutual funds too have begun to offer some variants of capital protection oriented structured products. (Also read - Things you must know about Capital Protection Schemes)
The risk in such products really comes from the complexity of the structure itself. Often, this complexity is used to hide some of the risks and expenses a customer could experience. Thus, it is important to understand the product very well before investing, especially in terms of its payoff under different market conditions. There is also a default risk of the issuer to be cognizant of, however small that might be.
International Investing
With the India growth story faltering a bit, it does not make sense to put all eggs in a single basket. If you were to look globally, there are far more attractive investment opportunities in other countries; mainly in developing nations. While there is a common notion that high diversification of stocks in Indian markets diversifies the risk, it does not take into account any major negative country specific event could have an adverse impact on the entire portfolio. A classic example are the events currently taking place; that of high inflation, high interest rates, bloating fiscal deficit, and possible early general elections due to which all stocks are taking an equal hammering, despite some being fundamentally sound. Diversifying internationally allows an individual to build a portfolio that can capitalise on each country’s strength. (Also read - Global Funds – Are they worth investing?)
To start with, one can always invest via International mutual funds which invest in a basket of international securities in different countries. International mutual funds are offered by a majority of fund houses like Kotak, Birla Sun Life, Franklin, Mirae Asset, ING etc. While some of them are funds of fund, others seek to invest directly in international equities. A majority of these funds are usually thematic funds which focus on some theme or country in a bid to explore a particular growth story. Even in the current calendar year for example, most international funds have lost less than domestic ones, and some have even posted a marginal positive return.
Venture Capital / Private Equity Investing
Venture capital or private equity investing proves to be a very lucrative option; especially in times of market downturn. Unfortunately, these options are usually restricted to HNIs as the ticket size is very high. Investments through these vehicles allow investors to seek out and take advantage of emerging companies or themes. Being early movers gives the advantage of buying companies cheap. Since the investing companies are small and growing, they typically have a low correlation with the market (unlike most listed stocks).
Real Estate Deals – especially Land
Real Estate always proves to be a lucrative option for long term investors. With land being a limited entity and the need for land always being on the rise, a potential investor always stands to gain in the long term. The value may keep fluctuating up and down but history suggests that the value of land has always gone up in the long term. Investors with significant sums of money can avail land in bulk thus making the whole proposition a bit cheaper due to better bargaining power.
With the real estate market undergoing a correction, land is being made available cheap in certain pockets of the country. Investors can scout for distress sale in properties and bargains in this space. Identifying good deals in select strategic locations can boost the returns significantly in the long term.
Bulk Equity Investing
Bulk equity investing is a risky but rewarding option for investors. Equity markets as unpredictable they are, it becomes impossible to time them and realise when they have bottomed out. An investor having a longer investment time frame and having the ability to hold on if markets go down further can definitely avail this option. The key here is to identify stocks with sound fundamentals which have been unnecessarily beaten up. Eventually, when the market realises the true value of these stocks and the prices will reach their true valuation. Warren Buffet has always followed this methodology of investing and has been duly rewarded every time.
Derivatives
The use of derivatives can be a useful option if executed well. It would be advised for smaller investors not to avail this option as transaction costs can bleed you dry. For HNIs, derivative can be used to hedge the portfolio or certain derivative strategies can be availed to enhance returns. For instance, if you hold substantial shareholding in a single company (as several promoters and ESOP holding employees often do), buying ‘put’ options on the index or a highly correlated stock may be a useful short-term hedge. (Also read - Derivatives – Learn to handle with care)
As mentioned earlier too, it is good to be aware of these options. But before investing, you would be well advised to research further on the specific asset class – its risks and rewards.
Structured Products
Structured products such as capital protection schemes are a great way to protect downside risk, while still being able to participate in the equity market. While this was traditionally only an HNI product, now the minimum investment cut-offs for such products have come down significantly. Mutual funds too have begun to offer some variants of capital protection oriented structured products. (Also read - Things you must know about Capital Protection Schemes)
The risk in such products really comes from the complexity of the structure itself. Often, this complexity is used to hide some of the risks and expenses a customer could experience. Thus, it is important to understand the product very well before investing, especially in terms of its payoff under different market conditions. There is also a default risk of the issuer to be cognizant of, however small that might be.
International Investing
With the India growth story faltering a bit, it does not make sense to put all eggs in a single basket. If you were to look globally, there are far more attractive investment opportunities in other countries; mainly in developing nations. While there is a common notion that high diversification of stocks in Indian markets diversifies the risk, it does not take into account any major negative country specific event could have an adverse impact on the entire portfolio. A classic example are the events currently taking place; that of high inflation, high interest rates, bloating fiscal deficit, and possible early general elections due to which all stocks are taking an equal hammering, despite some being fundamentally sound. Diversifying internationally allows an individual to build a portfolio that can capitalise on each country’s strength. (Also read - Global Funds – Are they worth investing?)
To start with, one can always invest via International mutual funds which invest in a basket of international securities in different countries. International mutual funds are offered by a majority of fund houses like Kotak, Birla Sun Life, Franklin, Mirae Asset, ING etc. While some of them are funds of fund, others seek to invest directly in international equities. A majority of these funds are usually thematic funds which focus on some theme or country in a bid to explore a particular growth story. Even in the current calendar year for example, most international funds have lost less than domestic ones, and some have even posted a marginal positive return.
Venture Capital / Private Equity Investing
Venture capital or private equity investing proves to be a very lucrative option; especially in times of market downturn. Unfortunately, these options are usually restricted to HNIs as the ticket size is very high. Investments through these vehicles allow investors to seek out and take advantage of emerging companies or themes. Being early movers gives the advantage of buying companies cheap. Since the investing companies are small and growing, they typically have a low correlation with the market (unlike most listed stocks).
Real Estate Deals – especially Land
Real Estate always proves to be a lucrative option for long term investors. With land being a limited entity and the need for land always being on the rise, a potential investor always stands to gain in the long term. The value may keep fluctuating up and down but history suggests that the value of land has always gone up in the long term. Investors with significant sums of money can avail land in bulk thus making the whole proposition a bit cheaper due to better bargaining power.
With the real estate market undergoing a correction, land is being made available cheap in certain pockets of the country. Investors can scout for distress sale in properties and bargains in this space. Identifying good deals in select strategic locations can boost the returns significantly in the long term.
Bulk Equity Investing
Bulk equity investing is a risky but rewarding option for investors. Equity markets as unpredictable they are, it becomes impossible to time them and realise when they have bottomed out. An investor having a longer investment time frame and having the ability to hold on if markets go down further can definitely avail this option. The key here is to identify stocks with sound fundamentals which have been unnecessarily beaten up. Eventually, when the market realises the true value of these stocks and the prices will reach their true valuation. Warren Buffet has always followed this methodology of investing and has been duly rewarded every time.
Derivatives
The use of derivatives can be a useful option if executed well. It would be advised for smaller investors not to avail this option as transaction costs can bleed you dry. For HNIs, derivative can be used to hedge the portfolio or certain derivative strategies can be availed to enhance returns. For instance, if you hold substantial shareholding in a single company (as several promoters and ESOP holding employees often do), buying ‘put’ options on the index or a highly correlated stock may be a useful short-term hedge. (Also read - Derivatives – Learn to handle with care)
As mentioned earlier too, it is good to be aware of these options. But before investing, you would be well advised to research further on the specific asset class – its risks and rewards.
