Will 2021 be the year of equities?

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Every investor wants to invest in the best investment options in such a way that he can achieve maximum return with minimal risk in a given tenure. The investment options that you choose should depend on your risk appetite, investment horizon, financial goals, investment objective and liquidity needs. Historically, retail investors in India were exposed to very limited options including gold, real estate, equities, mutual funds and fixed income products like bank fixed deposits (FDs), public provident fund (PPF), and bank recurring deposits (RDs).

With passage of time, thanks to financial engineering, investors today have a wide range of investment options including exchange traded funds (ETFs), real estate-investment trusts (REITs), and sovereign gold bonds. Given low financial literacy levels, a large section of public switch in between fixed income products and equities depending on the euphoria in the markets.

Because of declining returns, fixed income assets have become unprofitable and unattractive for risk-averse investors and retired employees – who rely on such products to get a steady income. In an environment of high inflation, such low returns on capital tend to undermine capital and thus the aces dwindle. Although volatility is consistent and unavoidable in equities, in this scenario equities can be considered as investment option provided investors tread carefully.

Indian indices are up about 95% since their March lows, due to excess global liquidity and low-interest rates. With central banks  not in a hurry to pull back the liquidity in the near future and in fact are willing to pump in more if needed, the party in equities will continue. Given these factors, the year 2021 is going to be the year of equities.

Within equities, while large caps have led the rally so far there are quite a few sectors that are yet to participate in the rally like cyclicals, sectors worst affected by social distancing norms including tourism, travel and hospitality and outdoor entertainment related stocks. Within cyclicals while metals stocks, more so in case of steel have already started moving up, other sectors like roads, infra, EPC players and real estate should start rallying now as it is widely expected that government would focus heavily on infra sector in the upcoming budget. Some other themes investors can focus on include turnaround stocks, cash rich public sector enterprises (in anticipation of divestment/buybacks and high dividend payouts) and companies which enjoy near-monopoly in their industries.

Investors should build a judicious mix of large caps, cyclicals, turnaround stocks and beaten down well managed small and mid caps with strong and solid fundamentals. Within large caps, while many large caps are trading at their 52-week highs, they should enter such stocks on dips perhaps on big down days. Investors may allot around 40% of their portfolio towards large caps, with balance equally allotted between cyclical, turnarounds and quality small and mid caps.

The writer is a market expert. Views are personal