Personal finance investment themes for 2021

As 2021 commences along with the union budget being around the corner, it is important to look at the various investment themes that are likely to succeed this year. Given 2020 was an incredibly difficult year for most people, the investment themes for this year will be very different from the year that went by. For retail investors, the implication is that they have to manage their assets very differently to lock in substantial gains. This column provides a starting primer.

Real estate: It is a buyer’s market!

Real estate prices have been muted for some time, especially with the economic slump in the first half of 2020. In case you are looking to get your own place, 2021 might be the best year with hordes of inventory, builders looking to liquidate by providing goodies and easy financing. This is applicable across all types of projects from affordable housing to premium housing. It is recommended to consider real estate only for the purpose of staying rather than investing due to poor rental yields, high transaction values and limited appreciation potential, especially older apartments.  

Domestic equity: Tread carefully!

The stock markets have seen a phenomenal rebound with a near 100% appreciation from the lows during the lockdown. While some of it is due to easy money and boosting consumer sentiment, a lot of it is due to irrational exuberance as exhibited by the Sensex PEs being ~30% over the long term average. For retail investors, 2021 might be a good year to book profits to drive optimal asset allocations and exit sectors that might not be favourable in the long run. It is, however, sensible to stay in sectors focusing on IT, pharmaceutical and retail consumption. It is best advisable not to purchase additional equity instruments in 2021 due to the markets being overvalued. In addition, it is sensible to avoid dividend oriented mutual funds and move to growth oriented mutual funds to avoid unfavourable taxation. 

International US markets: Stay bullish over 3-5 years!

The American markets have also seen a phenomenal rally over the last few quarters and is currently overvalued compared to its long term average. The long term prospects of the American markets, skewed towards the tech majors, is positive over a 3-5 year period cycle. For retail investors, this might imply gradually increasing the weight towards American stocks without crossing an overall portfolio weight of 10-15%. 

Debt markets: Limited upside but worthy investments!

In 2020, with continuously lowering interest rates, debt instruments showed significant gains in the range of 8-10%. With no further reductions in rates likely in the near term, the gains in debt funds might be limited with existing yields to maturity hovering around 4-6%. Despite this environment, these are worthy instruments given the asset bubbles occurring in the equity markets. For retail investors, debt asset vehicles to consider for deploying funds include corporate AAA bonds and government backed small savings schemes. 

Gold: Time to critically evaluate!

While gold has seen a spectacular rally over the last 18 months, it is calming down with a ~13% correction (from Rs. 57,950 in Aug 2020 to its current levels at Rs. 50,510) over the last few months. In terms of the outlook, there seem to be mixed signals on the asset class. With the vaccine being rolled out and consumer confidence booming, the rally should be dampened. However, with the fresh liquidity stimulus by various governments and easy monetary policy, the yellow metal might keep going northwards for another year. For retail investors, it is advisable to keep their existing allocation at 5-10% of total portfolio, for diversification perspective without purchasing more. 

Bitcoins and others: Stay away!

Bitcoins has seen a highly volatile rally over the past year even touching ~40,000 USD in early January 2021. While there is some traction for the currency from an official recognition perspective, it is best to stay away from it now given the low central bank control, visibility and enforceability. Similarly, financial derivatives should be a conscious no-no for retail investors who want to avoid weapons of mass financial destruction. In fact, allocating even 2-3% of your investment portfolio might be imprudent and fraught with risk. 

In conclusion, the retail investing themes for 2021 might be very different from those that existed in 2020. For retail investors, it might be prudent to carefully consider before venturing out. 

The old adage, the more boring personal finance gets, the more you stand to make money still holds.