After a volatile year for stock markets, unexpectedly great returns from gold and property and tepid returns from debt instruments, investors are filled with cautious optimism about the new year. ET Wealth reached out to experts to know what investors should do in 2023 to get the most bang for their buck. Here’s what they have to say. Rising interest rates have made fixed-income investments attractive, and some experts believe that the best returns in 2023 will come from debt rather than equity. Interest rates are expected to peak in the first or second quarter, and then start easing. When that happens, debt funds could deliver high single-digit returns. Experts say this is the time to grab this opportunity.

At the same time, the mid and small cap stocks corrected sharply in 2022 and are now trading at attractive valuations. Investors with an appetite for risk should consider entering these segments now. The past year also saw a spike in lending rates. Home loan rates, which were at 6.7% at the beginning of 2022 ended the year at 8.65%. This means home loan terms would have been extended by several months. If you have surplus cash, experts say prepaying loans is the best way to use it.

It is also a good idea to fortify yourself against unexpected situations. The resurgence in covid cases means one should have enough health insurance coverage to avoid a repeat of 2021 when people spent their life savings to save lives. Similarly, job losses have become very common. This is why experts advise the creation of new income streams to supplement the core income from jobs or businesses. We hope you find the 10 smart moves useful in the New Year. Wishing you good health, prosperity and safety in 2023.

 

Performance scorecard 2022

How investments fared during the year

Equities gave insipid returns

 

Debt returns were also muted

 

BUT GOLD SHONE IN 2022…

 

… While Real Estate Soared

Price appreciation in key micro markets in these cities since 2019

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PREPAY HOME LOAN IF HOLDING SURPLUS CASH

If a penny saved is a penny earned, borrowers stand to earn 8.5-9% returns on the amount they prepay.

The flurry of repo rate hikes has pushed up home loan rates from 6.7% in April to 8.65% now. If rates don’t come down, someone who took a 20-year home loan at the beginning of 2022 at 6.7% will have to pay about 149 additional EMIs (see graphic). Analysts expect things to get worse before they get better. Though inflation is down, it is still above the comfort level of the RBI. It may hike rates by another 25 basis points by March 2023. If this happens, home loan rates could touch 9%. When rates go up, extending the tenure is the default response of lenders. But that is not possible if the tenure extends beyond the working years of the borrower. The borrower then has two options: Either increase the EMI or pay a lumpsum amount to bring down the tenure.

 

Experts say prepaying a home loan may be the best way to deploy surplus money right now. “If a penny saved is a penny earned’, prepaying a home loan may be the best investment option available,” says Raj Khosla, Managing Director of MyMoneyMantra.com. Indeed, no other investment can yield better returns than the 8.5-9% interest saved on the home loan. It’s also a good idea to increase the EMI every year in line with an increase in income. This can have a dramatic impact on the loan tenure. If you take a home loan of Rs.50 lakh at 8.5% for 20 years, the EMI will be Rs.43,391. “But a 5% increase in the EMI every year will finish off the loan in a little over 12 years. If you tighten your belt a bit and increase the EMI by 10% every year, you can be debt free in less than 10 years,” says Khosla. However, do keep in mind the tax benefits on the home loan. The tax deduction on the home loan interest brings down the effective cost of borrowing.

 

HIKE EXPOSURE TO MID AND SMALL CAP SEGMENTS

Both the mid cap and small cap indices are trading at a discount to their historical averages.

The mid and small cap segments corrected sharply in 2022. Much of the froth has now been cleaned up. Trading at nearly 85 times earnings during the peak of 2021, the mid cap index (Nifty Midcap 100) now trades at a sober 23.4 times. The mid cap basket now retains only a modest premium over the frontline Nifty50 index (at 22.6 times earnings). Meanwhile, the small cap index, which was hovering at 65 times earnings at one point in 2021, is now valued at a more benign 16 times. Both indices are trading at a discount to their historical averages. Despite the sharp de-rating in broader indices, experts expect continued near-term pain for mid and small caps. Pankaj Tibrewal, Senior Fund Manager, Kotak Mutual Fund, says, “We are recommending this space with at least a 3-5 year perspective as near term volatility can’t be ruled out.”

If interest rates stay high, valuations of some of the ‘growth’ stocks in this basket could get pulled down further. But any correction in this basket will also provide an opportunity to invest in quality businesses for the long term. Investors must use this window to hike presence in mid and small caps. “Testing times are great opportunities but it depends if you see the glass as half full or half empty,” remarks Tibrewal. He observes that in the past 20 years, through various crises and cycles, patient and diciplined investors have made good returns in this space. However, experts insist that investors must be very selective. Vikas Gupta, Chief Investment Strategist, at OmniScience Capital, reckons that returns from a well-selected basket of small caps are likely to be lucrative given the large universe. But mid cap selection is tougher because of the narrow universe of 150 stocks.

 

THE FROTH IN MID- AND SMALL CAPS HAS DISSIPATED

KEEP SURPLUS HANDY TO INVEST IF THE MARKET FALLS

 

Markets will be volatile in 2023 and any sharp sell-off could be an opportunity to buy at low levels.

The stock market is expected to remain volatile in the coming months as the world grapples with uncertainties around recession, geopolitical tensions and Covid resurgence. Any sharp sell-off will be an opportunity for agile investors to buy at attractive prices. But the window may be open only briefly. Once any negatives are known and priced in, the market may quickly shift to ‘risk-on’ mode. The 2020 sell-off and ensuing rebound are good examples of how quickly the tide can turn.

Here is what you can do: Identify pockets of surplus now that you can deploy when the time comes. Even a part of your existing portfolio can be liquidated to give you the necessary ammo when required. If falling short of liquidity, some of your debt funds or fixed income assets can provide the cash flow. But don’t stray too far from your desired asset allocation. Once you identify the surplus, earmark portions of it for staggered deployment at every market fall. For instance, If the market declines 20%, move 20% of the earmarked amount into equities.

At 30% fall, investors may deploy another 30% of the earmarked amount. If the market dives below 40%, another 40% of the earmarked amount can be put into equities. The remaining 10% surplus may be deployed if the market falls beyond 50%. This is only an indicative plan and investors may identify their own thresholds and triggers.

LOCK IN TO HIGH BOND YIELDS

The yields to maturity of many debt funds have risen above 7%, providing an opportunity to investors.
The rate hikes of last year have pushed up the yields on bonds across maturities. However, experts insist that the room for a further uptick appears limited. Axis Mutual Fund observes in a note, “While we do not anticipate the end of the rate hike cycle just yet, market yields are unlikely to rise materially from here. Markets have priced in much of the incremental rate action.”

For investors, this provides a small window of opportunity to lock in at high yields. Experts maintain accrual funds and target maturity bond funds are well placed to make the most of the high yield environment. Liquid schemes, ultra short duration funds and low duration funds are currently offering average yield-to-maturity of 7-7.3%. “Investors with shorter investment horizons and low-risk appetite should stick with liquid funds. With the increase in short term interest rates, we should expect further improvement in potential returns from investments in liquid going forward,” asserts Pankaj Pathak, Head – Fixed Income, Quantum Mutual Fund.

Interest rates on saving bank accounts are just 3-4%, while liquid funds deliver higher returns. Therefore, liquid funds is a better place to park surplus funds. For longer time horizons, most advisers are recommending that investors target the 3-5 year maturity segment. This is where the riskreward is most favourable. Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund, remarks, “We would recommend investors look at funds having duration of 3-4 years with predominant sovereign holdings as they offer a better risk reward currently.”

Murthy Nagarajan, Head Fixed Income, Tata Mutual Fund, says, “The 2-to-5-year segment is attractive due to higher accrual and scope for capital appreciation when the rate cut cycle starts after one year. Investors can look to invest in short term, corporate bond and banking and PSU debt funds which invests predominantly in this segment.”

If you want more predictable returns, target maturity bond funds are the best avenue. With yields across various maturities above 7%, there is a particularly compelling case for putting money in target maturity funds. These funds have fixed terms ranging from three years to 15 years. Investors may target maturities aligned with the time horizon for specific goals. The only caveat is that you remain invested till the fund’s maturity, to fetch closer to the expected initial yield.

Investors may even consider building a ladder of target maturity funds with yearly rungs—so that some portion of the portfolio matures each year. For instance, investors may currently target a five-step bond ladder spanning the 3-7 year maturity segment with funds maturing yearly from 2025 through 2029. A flattish yield curve in this segment—offering 7-7.5%— makes this very timely. Having such a ladder will offer visibility of returns for multiple years at a stretch.

Alternatively, investors can create such a ladder by investing directly in government securities of any tenures of your choice. You can now do so by investing via the RBI Retail Direct platform.

 

YIELDS OF ALL DEBT FUNDS HAVE IMPROVED

 

GAIN FROM HIGH RATES ON FIXED DEPOSITS

Use these strategies to minimize illiquidity, reduce tax and make the most of the high interest rates

The repo rate hikes in the past few months have seen banks raise their fixed deposit rates to attractive levels, surging from slightly above 5% in January this year, for longer tenures, to over 7% in December, with those for senior citizens touching 8.3%. While this may be the best time to lock your spare cash in long-term FDs for the safety of capital and high returns, how do you deal with the problems of illiquidity, penalty on premature withdrawals, and tax on interest income? Investing smartly and strategizing can not only help you get higher returns but also pay lower taxes and avoid penalties.

USE LADDERING STRATEGY

“Instead of depositing a large lump sum, split it into smaller deposits of varying tenures, with a defined purpose or financial goal for each deposit,” says Dinesh Rohira, CEO & Founder, 5nance.com. This makes the investment more liquid because if have opted for a 5-year FD and require money after three years, you will have to pay a penalty of 0.5-1% to break the deposit. If, however, you have four smaller deposits with 1-, 2-, 3- and 4-year terms linked to specific goals, you will have the money when you need it without paying the penalty.

You can also benefit from rising interest rates by using this strategy because a shorter term FD can be locked into a higher rate after it matures, instead of locking in a large sum for a longer period at a lower interest rate.

 

USE FAMILY TO LOWER TAX

If your parents or adult children do not fall in the tax bracket due to low income, you can invest in FDs on their behalf and not only earn a higher interest rate—senior citizens earn an interest that is 25-75 basis points higher—but also save on tax.

 

USE SWEEP-IN FACILITY

This option allows any amount beyond a fixed threshold to be swept into a fixed deposit, which not only earns you a higher interest but if you want to withdraw money for an emergency, you will not be levied any penalty. “You can use these accounts for parking your emergency corpus since you can easily access the funds,” says Rohira. Opt for tax-saving FDs: A good way to reduce your tax liability is to opt for the 5-year tax saving FDs, which qualify for an exemption of Rs.1.5 lakh under Section 80C.

 

USE CORPORATE FDS FOR HIGHER INTEREST

Certain companies and NBFCs offer deposits that not only come with higher interest rates than bank FDs but also offer better liquidity due to simpler premature withdrawal terms. On the flip side, there may be a risk if you do not opt for a credible company, and these do not offer any tax benefits as do the 5-year tax saving FDs from banks.

 

MONTHLY INCOME

“If your retired parents need a regular income and don’t want to invest in mutual funds, fixed deposits are a good option,” says Rohira. Opt for a non-cumulative fixed deposit, where the interest is not reinvested but paid out at pre-determined intervals, be it monthly, quarterly, half yearly or annually. The interest rate may be slightly lower than the cumulative deposit, where compounding till maturity increases the rate, but senior citizens will be assured peace of mind.

 

CHOOSE FD THAT SUITS YOUR NEEDS

Cumulative FD

If you want to lock in at high rates or have a fixed financial goal.

 

Non-Cumulative FD

If you want a regular income.

 

Sweep-In FD

If you need easy access to a large amount in a short period.

 

Multiple FD

If you have defined goals in specified intervals, say, in 2,3, 5, or 7 years.

 

5-Year Tax-Saving FD

If you have a large corpus and no need for it for a long duration.

 

Floating Rate FD

If interest rates are on the rise.

 

Corporate/NBFC FD

If you want a higher interest rate and are willing to take a little risk.

 

TAKE ADVANTAGE OF THE SHARP DECLINE IN US MARKETS

But don’t expect a repeat performance of the high returns generated by US stocks in recent years.

The US markets corrected sharply in 2022. The decline in big tech stocks in the US led to a steep 33% fall in the US Nasdaq 100 index. The pace and ferocity of the US Federal Reserve’s hikes, together with earnings disappointments, dragged the market favourites down to earth. Experts maintain this correction should be seen as an opportunity for building long term exposure to the US tech sector. “If one can tolerate uncertainty and volatility, this is the best time to allocate to technology,” insists Vikas Gupta, Chief Investment Strategist, at OmniScience Capital.

The good news is that several mutual funds investing in foreign markets have opened up again for investors. Last year, Sebi temporarily imposed restrictions on funds’ investments in overseas markets after these collectively breached the industry-wide cap for overseas investments. While the regulatory cap remains, the sharp correction in foreign markets has opened up space for additional investments, allowing funds to accept inflows.

Particularly, investors in US dedicated funds who couldn’t take advantage of the lower prices can now place their bets. This also serves as a timely moment for investors to moderate their domestic bias and diversify into foreign equities. Investing in the US markets allows local investors to bet on innovation and other value-generating themes not available in India. However, experts warn against rushing headlong into the US market now that the gates have reopened. Mutual fund research outfit FundsIndia observes in a note, “While we believe this is a good time to start building exposure to Nasdaq 100 index, we would like to gradually build our exposure rather than go all in at this juncture.”

Besides, investors also need to temper their return expectations. This will help avoid disappointment and untimely exits. Since the 2008-09 crash, the US markets enjoyed a largely uninterrupted bull run until recently. The mouth-watering returns of previous years were largely driven by the extremely low interest rates and very high liquidity facilitated by unabashed money printing by the US Federal Reserve. But that phase of easy money is now over. As markets adjust to higher interest rates, returns are likely to moderate going forward. Therefore, investors should use this avenue more as a tool for diversifying out of the domestic market bias rather than trying to extract higher returns.

 

BE PREPARED FOR MEDICAL CONTINGENCIES

You should not only have adequate insurance but also go over the logistics of handling a medical emergency.

With reports of a fresh surge in Covid cases, as well as outbreaks of measles and dengue in the country in 2022, it is crucial to be prepared for medical contingencies in the coming year. The two-fold preparation requires both financial and physical readiness. Besides adequate insurance and sufficient funds, you also need to plan the logistics of dealing with a medical emergency. “Not just Covid, but many post-Covid scenarios like long Covid and its side effects have not been captured. The increased health concerns necessitate a bigger cover,” says Dinesh Rohira, CEO & Founder, 5nance.com. This means that if you are less than 30 years old and live in a metro, you may need to upgrade from Rs.5 lakh cover to a minimum of Rs.10 lakh basic indemnity plan. This amount should be increased with age, which means that those over 40 years old, should have Rs.15-20 lakh cover. Here’s how you can ensure sufficient insurance at optimum cost.

 

USE MAXIMUM EMPLOYER COVER

Take the maximum coverage that your employer provides, even if you have to pay extra because it will still be 20-30% cheaper than the market plan. Also, if the plan covers your parents, you can reserve this for them and buy an independent plan for yourself and your family. “However, the employer’s plan may not be sufficient since high healthcare inflation means that normal treatment costs have become as high as the cost of surgical treatment. So buy an independent cover as well,” says Sanjay Datta, Chief, Underwriting, Claims & Reinsurance, ICICI Lombard.

 

BUY A BASE AND TOP-UP PLAN

The best way to increase your cover size is to buy a small base plan and a bigger super top-up plan since the latter will cost you much less compared to a bigger base plan (see table). So if you have a Rs.5 lakh plan, buy a Rs.20-25 lakh super top-up plan with a deductible of Rs.5 lakh. Top-up plans are also available as family floater covers so you can insure your family members at a lower cost. Remember, however, not to include your parents as their age will push up the premium cost. Instead, buy your parents a separate base plan and super top-up cover.

 

KEEP A BUFFER AMOUNT

Even if you have adequate insurance which covers hospitalization, there are several out-of-pocket expenses for which you should have ready cash. A buffer amount can also be useful if there is a delay or an issue in cashless reimbursement and you have to pay upfront at the time of admission. Besides insurance, you should also be ready for medical emergencies. Make sure you not only have mobile access to ambulance and doctor but also have your spouse’s, children’s or friends’ numbers on speed dial. You should also inform your partner or friend about bank details in case money is required urgently in an emergency. Besides, they should be aware of where your insurance and medical documents are stored. Ideally, these should be saved digitally on your phone and shared with a relative or friend.

 

HOW TO GET THE LOGISTICS IN PLACE...

Be document and transport ready before an emergency strikes.

 

KEEP POLICY DETAILS ON THE PHONE

All that you need to make the hospital admission cashless is to have your insurance policy number. Store it on the main screen of your mobile phone at all times.

 

SHARE DETAILS WITH SPOUSE OR CLOSE FRIEND

Keep your spouse, adult child or friend aware of where you keep your insurance policy, be it offline or online, and relevant passwords. If funds are to be sourced, have at least one trustworthy person know the ATM/bank/credit card details.

 

BE TRANSPORT READY

Decide with the family how a sick member will be taken to the hospital, if needed, in an emergency. If an ambulance is required, all members should store the relevant number on their phones.

 

SPEED DIAL

Keep the mobile numbers of people you would want to alert immediately about a medical emergency, of insurer and ambulance, on the speed dial of your phone.

 

TOP-UP PLANS: HIGH PROTECTION, LOW COST

 

With the possibility of a slowdown and memory of massive job losses during the pandemic still fresh in the mind, it would be prudent to take pre-emptive steps to secure one’s income stream. While it helps to upskill and specialise in a manner that you become virtually indispensable for your employer, there is little you can do if a company is forced to downsize due to macro factors. Moonlighting is not an option in the light of the largescale lay-offs by tech companies like Wipro and Infosys in the past year, but there are other ways in which you can secure your future income. One is to practise a skill that can be kept as a backup and monetised at a later date. Two, freelance or find temporary work that does not breach your employment contract; and three, create an asset or leverage an existing asset to provide income.

“In the formal sector, there can only be one employment at any given time, but there can be various ways in which employees can have an alternative source of income as a backup,” says Neeti Sharma, Senior Vice-President, TeamLease Services.

Along with your primary job, you can keep honing your hobby or skill. “In the past two years, a lot of people have followed their passions, be it designing or cooking, and turned it into a business or kept it as a backup source of income,” says Sharma. It will take time to practise, build a network and establish credible reputation, so if you haven’t already started working on it, do so now.

If you can acquire new skills in different verticals or develop expertise in a new field, you will have created a backup if you are laid off. “It’s not about doing an online course, but working on real-life skills to make them your income insurance policy. They may not pay immediately, but if you lose your job, you can depend on these to get a new one,” says Devashish Chakravarty, Career Coach, Mentor & Author of Yoursortinghat.com. For instance, if you are in print media, you could pick up designing and offer your services outside your company for free. You will be able to make contacts, create a network and a new line of expertise to fall back on.

You can also leverage social media, using it to propagate your skill, teach or even become an influencer, with the latter being paid well to project products or give feedback. This would again entail preparation and time to attract the required number of followers and start earning from the platform.

If your company permits, and you can freelance, teach or consult, you can do multiple projects and create several sources of income while being on the right side of law. Several gig platforms offer temporary jobs for freelancers and consultants without it impacting their primary jobs. Some such gig platforms include Workflexi.in, Jobs4her, and smaller players like FlexiBees.

“If you have high-order skills and can offer your services for a short duration to, say, a startup, in exchange for an asset such as stock or equity, you are creating an asset for yourself,” says Chakravarty. You could also monetise an asset such as property, or if you have a car, you could lease it to a car rental company, thereby creating an additional source of income.

Hyperinflation, geopolitical tensions and fears of Covid coming back created the perfect storm for gold and silver in 2022. The precious metals were the second best performing assets during the year after real estate. Experts say the two metals will do well this year as well. “Our medium target of Rs.53,000 per 10 grams for gold and Rs.64,500 per kg for silver was achieved recently. We do see some signs of exhaustion in both metals but these dips could be used as buying opportunities by medium to long-term investors for the target of Rs.58,000 in gold and Rs.82,000 in silver,” says Navneet Damani, Senior Vice-President, Currency & Commodity, Motilal Oswal Financial Services.

The year 2022 was terrible for crypto investors. Even the bluechips like Bitcoin and Ethereum slipped more than 60%, while smaller coins also saw their prices fall off the cliff. But they are still better off than investors in Luna, which crashed to zero in May. The RBI and Sebi have long washed their hands of cryptos so investors have slim chances of recovering their losses.

… but don’t expect them to bounce back in 2023