Portfolio Diversification | How to invest like an expert?

You have no doubt heard the idiom, ‘don’t put all your eggs in one basket’. When it comes to investment, this is THE golden rule. The smartest investors ensure portfolio diversification of their investment, which simply means spreading your capital across different forms of investments and financial assets. If you don’t diversify your investments, two things can end up happening — (A) you end up investing only in assets like bank deposits, which will keep your money safe and stable, but give very low and slow returns. (B) You invest too heavily in volatile instruments such as stocks in the hope of making quick money but expose yourself to the risk of losing your capital as well.

Stability And Returns

What if you could add an asset that is not only low-risk but also yields high returns? It may sound too good to be true, but that’s exactly what hBits is offering to do for your portfolio through fractional ownership of a pre-leased commercial property: lend balance and stability, along with handsome profits. Try and imagine your investment portfolio as a see-saw (refer diagram below).

On one side, you’ve invested in, let’s say, the stock market, an infamously volatile domain of investment. This has the potential for high returns, sure, but carries the immense risk of losing your money as well. Any major disaster, political turmoil, or even a pandemic — like the one we’re going through right now — can result in a fall in the market. Indian equity markets fell to their lowest in three years after the Covid-19 outbreak began in India. News outlets have reported that on a price-book value basis, valuations hit an 18-year low during this pandemic, touching the same levels as they had during the 2008 global financial crisis. The Nifty, which yielded a one-year return of 15% last year, has now dropped to just 5% this year. So if one invested ₹10 lakhs in Nifty last year, hoping to make 15% returns or ₹1.5 lakhs each year, during the pandemic those returns dropped to about ₹50,000 for the year. There are others who were far more unlucky and ended up losing chunks of their capital as well, with some share values plummeting.

On another side, you have fixed-income assets such as fixed deposits, government bonds, insurance plans, etc. These provide the stability of steady income, no matter the condition of the market, but thanks to the risk-reward trade-off, the returns are on the lower end. Fixed deposits are currently offering paltry interest rates between 4% and 6%. So a ₹10 lakh FD would yield downwards of ₹60,000. Even with all the stability, these bank deposits are said to offer, they are not immune to the effects of this pandemic either — interest rates continue to fall at Indian banks this year, which means returns will dry up as well.

In our investment portfolio see-saw, investing too much on the safer right-hand side will result in stability, but will also suppress income. On the other hand, investing too heavily in the riskier left-hand side could topple the see-saw altogether. But now, let’s take a look at the middle section that is balancing both sides — fractional ownership of a pre-leased commercial asset. This is the unicorn asset that offers both high returns and low risk.

A step above regular commercial property

hBits offers only the most premium Grade A commercial properties that are pre-leased.Why are these two points highlighted? Because they are what ensures the win-win combination of high returns and low risk.

The reason hBits picks up only the best Grade A property is because they fetch the highest rental returns, clocking in about 6%-12% per annum. At these rates, an investment of ₹10 lakhs could fetch you anywhere between ₹60,000 - ₹1.2 lakhs per annum. These properties are usually rented by MNCs, banks, IT offices, and other entities with deep pockets, who can afford to pay premium rent for the premium space.

Now that we’ve explained how returns are high, let’s look at the low-risk factor. Commercial real estate has always been a high-return investment but was traditionally thought of as a high-risk area as well, for two reasons: the big ticket or huge capital required, and the risk of losing a huge amount of income in case of a vacancy.

hBits has addressed the first point through fractional ownership; for the first time, anybody can choose to invest in Grade A commercial property with even ₹10 lakhs in hand. How hBits makes this happen is by bringing together several investors, and helping them pool their smaller investments to then buy multi-crore office properties in premium business districts. This way, you can be a co-owner of a multi-crore property without shelling out crores of Rupees. By sharing ownership with others, one also ends up dividing any risk from the asset. At the same time, the rental returns, while shared among many, still make quite a good profit for the investor.

As for the second risk factor, again, hBits only offers pre-leased assets, which means that buyers don’t have to waste time and money looking for a tenant while losing out on precious rental income. There is added stability from the fact that premium commercial real estate is usually leased out with a lock-in period ranging from three years to five or even ten years. The tenants, which are usually large corporations, usually do not change their address frequently, and so, are likely to extend the lease further. This means that investors who bought properties through hBits have continued to enjoy high rental returns even through this pandemic, earning more than they would through bank deposits and even the stock market.

How can this improve diversification?

Unaffected by bear markets: Property returns have a very low correlation with other assets and financial markets such as stocks, so a crash in the stock market would not affect your rental return.

Maintain high yield: By using commercial property as the stabilizing, fixed-income portion of your portfolio, you can reduce the risk without reducing your income, which is not possible with low-yield instruments like FDs.

Tangible asset: One of the best things about investing in property is that it is a tangible asset, which means it’s easier to relate to and understand than, say, stocks. It also gives investors a sense of security and control over their asset, since they can touch it, feel it, and can access it readily, which is quite different from a paper asset like an FD.

Capital appreciation: Another winning point about commercial real estate is its potential for growth in value. To some extent, this is in the investor's control as well, since they can increase value directly by improving amenities. Added to that, is the assurance of steady capital appreciation thanks to the premium location and build selected by experts at hBits.

Hedge against inflation: hBits ensures a clause in the rental agreement that will escalate rental income by 15% every three years. This protects your income by setting off future inflation. In this manner, rental income increases with inflation, as opposed to falling interest rates in bank deposits and bonds.

Monthly income, credited immediately: Unlike many other forms of investment, where one is required to cash out before accessing their returns, your rent will be credited straight to your bank account month after month by hBits.

Keep the see-saw stable

As hBits’ Director of Business Development and Investments, Mr. Ankush Ahuja, says, “Fractional ownership of commercial property is a game-changer and unlike any other financial investment. It’s more affordable than regular commercial real estate, safer than the stock market, and more profitable than bank deposits and bonds. In fact, it’s easier to understand and manage too, if you invest through a platform such as hBits, which does all the work and research and maintenance for you, while you can sit back and enjoy the profits.”

Make this the fulcrum, or center of your investment portfolio to offset risks from more volatile assets, while simultaneously maintaining a high overall yield.