Investors seem to be willing to take more risks in bullish markets.
This could be because they believe markets will remain strong or because they missed the bus earlier. This is very typical of bull markets.
Chasing higher returns with risky products
With traditional fixed income products giving low returns, the hunt for higher yields is making investors choose covered bonds and NCDs, which deliver 3-4 percent points a year over what bank fixed deposits do. Even peer-to-peer lending and invoice discounting are being explored. Full-page advertisements from platforms promoting these products seem to be working.
The instant gratification mantra is making investors forget risk aspects. Instruments such as cryptocurrency and invoice discounting are not regulated and, with P2P, covered bonds etc., there is concentration risk and even institutional investors are finding it difficult to recover monies when things go wrong, despite all the collaterals.
In the last six months, there were a slew of mutual fund NFOs. A majority were in the thematic and index funds category. Most funds were filling in gaps in their product offering. There were some good NFOs such as that for a Nifty equal weighted index fund, but there are other existing schemes in the category. Almost all NFOs were in the very high-risk category and I am not sure investors really understood what they were getting into.
The problem with high-risk products is that investors may not feel the same way about them in the future, especially when the markets are down.
Instead one may consider more sustainable, medium-risk products that may not give the highest returns but are regulated with enough publicly available data. Real Estate Investment Trusts (REITs) and National Pension Scheme (NPS) are two such products which investors may have missed.
Regulated investments
NPS is a market-linked retirement product and comes with various investment choices. There are pre-set investment options according to age, for those investors who find it difficult to decide the debt/equity allocation.
What works in favour of NPS is that
-It makes investor disciplined as contributions need to be made every year to keep the account live
-The funds are locked in till retirement thus reducing churning
-The equity option can compound wealth over a long period
-Investments are not concentrated
Essentially, one follows the right way of investing regularly with NPS. Low costs and tax efficiency are added advantages. Hopefully, the rule on the mandatory annuity at maturity will be changed to allow more flexibility on withdrawals.
Investors can start evaluating REITs, too. Currently, there are three REITs in India and the performance has been reasonable. Many investors contemplate buying a second residential property as an investment with a view of making 20 percent returns. Alas, the long-term growth from residential properties is 5-6 percent annually in major cities and this does not include maintenance costs, property tax etc. Rental yields in most cities are 3 percent and liquidity is very low.
REITs in India are allowed to invest only in commercial real estate and need to mandatorily distribute 90 percent of their rental income as dividend. Further, REITs need to have 80 percent allocation to completed, income-generating properties. With the minimum investment being revised to Rs 10,000-15,000, the liquidity in REITs should improve.
Factors working for REITs are:
They mainly own Grade A commercial properties rented out to large conglomerates or multinational companies
-Well-regulated with stipulated rules
-Rental returns of 6-7 percent a year are commensurate with bond funds and are tax efficient (with some conditions)
-Opportunity for capital appreciation as office spaces are expected to appreciate given the demand
-Can be used for regular income
Of course, investors must consider these options only if they tie in with their financial goals and based on their asset allocation.