In the second week of 2022 (when we wrote this Update), our quarterly review of long-term expectation of Returns and Risk of asset classes relevant to Indian investors remains similar to that from the Quarterly Update of September 2021. While the omicron variant affected the economic outlook, the world has become a lot more effective in dealing with the pandemic. Vaccinations, safe distancing protocols and other measures are part of daily life. Covid is now endemic in the world and there are multiple paths for economies to move forward.
In India, the economy is recovering from the first effects of the pandemic. However, risks of inflation have moved to the fore. No longer is inflation seen as transitory and is a global phenomenon. While some inflation is positive, runaway inflation is negative to the markets. We believe that central banks of the major economies will act in a reasonably coordinated manner to keep inflation in check. However, the trajectories and timing of actions will likely result in the process taking longer than currently anticipated. Supply chain bottlenecks continue to persist – and are likely to remain for a while and will affect inflation.
The current economic and corporate data continues to have a lot of noise – driven by expectations as well as policy measures with little certainty of long term outcomes. Against this backdrop, we retain our long term expectations of returns for our asset classes, and increase the risk associated with cash and fixed income. For commodities, too, we expect an uptick in risk. Policy rates will rise, and even though the “when” and “how quickly” is uncertain, we add an additional 50 bps in return for cash & cash equivalents.
Table 1: Risk Return Long Term Expectations
Note: We use a broad sample of instruments accessible to retail investors such as mutual funds and ETFs to compute the pre-tax total returns. Each asset class is a collection of individual instruments. For instance, Cash and Cash Equivalents includes Fixed Deposits as well as Liquid Funds. Data is over a long time period, and we overlay historical returns with future expectations of the returns to arrive at the expectations. Our time horizon of expectation is 5-7 years. An investor cannot invest directly in the asset class. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Assert class returns do not include any expenses, fees, transaction costs or sales charges, which would lower performance. For illustrative purposes only. Past performance is no guarantee of future results. Real results may vary.
If there was one take-away it is this: expectations of forward returns should be lowered. The additional volatility can go either way, and while our long-term return expectations do not change, the additional volatility points to increased risk in portfolios.
Our long-term expectations of returns and risk serves as the basis for building the baseline “desired zone” of expected Return and Risk for different risk profiles in the Qfinr app. Our approach generates over 3 million portfolios of varying allocations to the 5 asset classes from which we select risk-return trajectories for each of our 5 risk profiles.
For a medium term investment time horizon (3-5 years), the asset allocation that investors could consider:
Table 2 : Asset Allocation Ranges
In Qfinr, users can compare the expected returns and risk characteristics of their portfolios against ‘ideal’ portfolios. This analysis can be a useful input for discussions with their financial advisors.
If you would like to know more about historical returns of asset classes in India read ‘Historical Nominal and Real Asset Returns in India’. Our team has also published a paper on the current high valuations in the equity markets and the forward returns titled ‘Shiller’s CAPE and Forward Real Returns in India’ that might be of interest.
Qfinr is not a financial product advisory service and does not provide any financial product advice specific to your circumstances. We provide numeric information only based on data entered by the user and/or data otherwise available to us and the output presented is derived from that information as a result of calculations using our methodology. This output is not a recommendation nor is it a statement of opinion. It is not a solicitation or attempt to effect transactions in securities or the rendering of personalized investment advice. As such, the information should not be construed as being personalised financial, investment or professional advice, nor should be deemed to constitute as an offer or provision of such advice.