Why Diversification Is Still The Best Game For India's Retail Investors

It ensures that retail investors will be in a position to benefit from any asset class doing well or limit any losses

- Vivek Kaul

• It's now expected that RBI will start cutting rates, leading to bond yields falling and bond prices going up

Retail investors are going through a very good phase. Stock prices have reached never before seen levels. Interest rates on bank fixed deposits and small savings schemes are higher than inflation. Gold prices have also gone up over the last year. So, how should a retail investor play this? Before answering that question it is important to understand why we are where we are.

What about stocks?

In its latest monetary policy meeting on 12-13 December, the US Federal Reserve said that it expects the federal funds rate to be at 4.6% by end 2024 and lower thereafter, down from the earlier forecast of 5.1%. The federal funds rate is the rate at which banks in the US lend money to each other on an overnight basis. The rate currently stands at 5.25-5.5%. If the Fed cuts this rate 25 basis points at a time, it will have cut the rate thrice for it to be at the projected level. One basis point is one hundredth of a percentage.

Now, how does all this impact the Indian retail investor? With the funds rate being projected lower, the Fed is trying to tell the world that it expects the interest rates in the US to come down. Lower US rates mean that large institutional investors will earn lower returns on their US fixed income investments.

So, they’ll look for higher returns across the world. In fact, foreign institutional investors (FIIs) have already been doing that, given that they were banking on the Fed cutting interest rates in 2024. From 1 December to 15 December, they have net invested ₹42,733 crore, or $5.13 billion, in buying Indian stocks. And this is why the BSE Sensex, India’s most famous stock market index, has risen 6.7% since the end of November and up to 15 December.