Most investors spend a lot of time hunting for the right stocks, mutual funds and bonds to invest in. But one decision that plays a far bigger role in your long-term investment results is asset allocation. In this Personal Finance podcast from Business Line, Nitin Shanbhag, Head of Investment Products at Motilal Oswal Private Wealth talks to Aarati Krishnan, Consulting Editor, on the outlook for a range of asset classes and how investors should allocate to them. Nitin has 17 years of experience in markets and advises high net worth and ultra-high net worth clients on asset allocation and investment strategy.

The top-of-mind question for most equity investors today is if the market is too expensive and whether it is time to book profits in their equity portfolios, after indices have breached lifetime highs. Mutual fund houses use models based on the Nifty50 PE and Price to Book value, to make this decision.

Asked if this is the right time to be booking equity profits based on Nifty PE, Shanbhag explained that Motilal Oswal uses a proprietary model, based on many variables beyond the Nifty PE/PBV to make this call. His view is that investors can still allocate to equities because strong earnings underpin the recent market rally. He however cautions that the mid and small-cap segments are expensive relative to long-term averages while large-caps are still at long-term averages.

Stocks and bonds seldom offer investing opportunities at the same time. But today we are in a position where interest rates have climbed significantly. Long term government securities in India now offer close to a 7.4% yield, while highly rated corporate bonds offer close to 8%. Mr Shanbhag says that with interest rates likely to decline over time and Indian g-secs being included in global bond indices, long duration g-secs offer a good investment option, both as direct investments and via the mutual fund route.

But to capitalise on the flat yield curve, investors need to explore multiple regular income options ranging from g-secs to bonds and REITs or Invits. Private credit vehicles are also a good alternative right now, he feels.

On a question on why gold has not really outperformed despite crises such as Covid and the Russia-Ukraine and Israel-Hamas conflicts, he points out that gold has delivered a pretty good return of 15% in 2023. He recommends gold mainly as a portfolio hedge to investors holding high allocations to risk assets like equities. Sovereign gold bonds are the best vehicle to buy gold as their coupon of 2.5% in effect allows you to invest in gold at a discount to the prevailing market price.

Finally, asked whether the 100 minus age rule really works for asset allocation, he replies that investors need to factor in many other variables to decide on their asset allocation. He asks investors to prepare an investment charter that lists out their income, savings, financial goals etc to arrive at an asset allocation plan.

Tune in for a detailed conversation.

Host: Aarati Krishnan, Producer: Siddharth Mathew.

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About the State of the Economy podcast 

India’s economy has been hailed as a bright spot amid the general gloom that seems to have enveloped the rest of the world. But several sectors continue to stutter even as others seem set to fire on all cylinders. To help you make sense of the bundle of contradictions that the country is, businessline brings you podcasts with experts ranging from finance and marketing to technology and start-ups 

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