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Pessimist portfolio: eschew equity, stick to fixed-income investments

india Updated: Apr 23, 2012 21:48 IST
Dhirendra Kumar

It must be so satisfying to be a chronic pessimist right now. The endless gloating over each piece of bad news and the joy of I-told-you-so conversations with whoever is willing to listen is what the bad-news junkie lives for.

And their numbers are growing. With every day that passes, more and more investors join the ranks of those who believe that all is lost. If news reports are to be believed, then even hard-core optimists and established insiders (Deepak Parekh and Kaushik Basu, to name two) are now going over to the dark side.

However, what concerns me more is that an increasing number of ordinary savers and investors are now joining the ranks of the deeply depressed.

Whether it’s stock valuations or the rupee or the European situation, these people are firmly focussed on the worst-case scenario and would like to invest accordingly. What should such an investor do today? What should the pessimist's portfolio look like?

The obvious thing for such a portfolio would be to eschew equity altogether and stick to quality fixed-income investments. There's both a push and a pull for this. From the pessimist's view, equity carries too high a risk even from current levels. However, given the government's appetite for borrowing and the high inflation, the returns from fixed-income are likely to stay high. But not any fixed-income would do. In a time of real business distress, the only acceptable option would be government-backed fixed income avenues like the various small savings schemes and deposits with public sector banks.

Depending on the kind of pessimist you are, you could also look at overseas equity. Even though there are dark clouds everywhere, the pessimist would probably see the clouds over the rupee as darker. Which means that some allocation to an international, diversified equity fund would make sense as the returns would get enhanced by whatever amount the rupee declines by. So it's actually quite simple to be a pessimist (not that that's a recommendation). Sovereign-backed deposits and a bit of foreign equity and that's about it.