Chasing returns by investing in assets like crypto, or any other difficult-to-understand, speculative, complicated products, would be a mistake, said an expert.
Investment is a tough job but portfolio diversification can make it easier. The volatility in the various asset classes around their all-time highs add to the woes of investors, who are looking to ride the tide. However, smart investors, who have a view of 5-7 years, should aim for discipline, instead of timing the markets.
Equity benchmark indices, BSE Sensex and Nifty50, are hovering around their all-time highs, while the Bitcoin also scaled its record high $73,750 about a week ago. Safe haven gold climbed peaks of Rs 66,000-mark on Thursday, after the US Fed monetary policy, wherein it signaled rate cuts soon.Long Term debt funds are expected to give higher returns after rate cut as the interest rate and bond prices are inversely proportional. On the other hand, the rising volatility in the riskier assets, which are expected outperform in the view of rate cuts, has puzzled the investors who are looking to put their money in various asset classes in the wake of diversification to maximise their returns.
Experts suggest investors not to put all eggs in one basket and diversify their portfolios into various asset classes based on their needs for higher risk-adjusted return. Diversification helps investors to achieve overall portfolio consistency. Here’s how an investor with a medium risk-appetite can invest their funds in the current market across various asset classes for a period of 5-7 years.
Equity and stocks
If the definition of medium-term is 5-7 years, then most investments should be equity-oriented with just 10 per cent each in debt and gold for stability and risk management, said Harsh Gahlaut, Founder and CEO, FinEdge. “Even investing in equities, SIP is the best strategy, which would keep the portfolio fluid, allowing it to mitigate risk and take advantage of market volatility,” he said.An investor can have an allocation of a passive large-cap fund with 20 per cent, a flexi-cap fund with 50 per cent and a mid-cap fund with 30 per cent allocation from a 5-7 years perspective, Gahlaut said. “This would allow significant diversification and balance risk in your portfolio,” he adds.
Fixed Income or Debt
Debt as an asset class is great for medium-term goals, said Vineet Agrawal, Co-founder, Jiraaf, an online bond platform The risk adjusted returns on debt investments look attractive and the investments are not market linked and volatile asset classes, he said. “For a moderate risk appetite investor, consider 40-50 per cent in debt, 40-50 per cent in equity, and the rest 10-20 per cent in other asset classes,” suggested Agrawal. “Within the debt segment, recommend diversification across corporate bonds and government securities considering expected returns, risks, investment tenures, and sectors,” he added.
Gold and precious metals
Amid the current market conditions, where there is so much uncertainty, and all asset classes are at record highs, one should be very cautious and realign their portfolios, said Sachin Kothari, Director at Augmont. The ideal balanced portfolio mix for a medium-term perspective should be 50 per cent in equity, 20 per cent in debt, 10 per cent in gold, 10 per cent in cash, 5 per cent silver and 5 per cent in crypto, he said.One should invest 15-20 per cent of the portfolio in gold and silver combined, suggested Kothari. “Gold has given more than 11 per cent CAGR returns and silver has given 9 per cent CAGR returns in the last 20 years. In recent years, silver has underperformed gold. One should look at this commodity for long-term investment as fundamentals are framing out to be very good,” he adds.
Crypto/Bitcoin
Amid the correction across the markets, it is a good time to accumulate assets within uncorrelated markets like crypto and gold and invest in SIPs to average out the risk and maximize the profit in the longer term, said Edul Patel, CEO of Mudrex, a crypto Platform. An ideal portfolio should have not more than 5-10 per cent of crypto in their overall portfolio, he said.Bitcoin and other crypto tokens continue to remain an unregulated asset class in Indina. The Indian government maintains a cautious stance on cryptocurrency despite Bitcoin’s surging value. Union Finance Minister Nirmala Sitharaman highlighted the dangers associated with unregulated crypto at the India Today Conclave held last week.”Investors should see high market capitalization cryptos as established companies and others as startups. For less to medium risk takers, it is good to have high market cap tokens with strong fundamentals. For high-risk takers, they can invest in altcoins after doing their own research,” added Patel.However, the veteran investment Guru is not a crypto fan. Renowned for his expertise in precious metals like gold and silver, Jim Rogers remains deeply skeptical about cryptocurrencies’ long-term prospects. Rogers also predicted the eventual demise of Bitcoin.Speaking at the India Today conclave, Rogers expressed his reservations. “I don’t expect it to last. It’s been fabulous for some people now. Not for me, but I do not see any long-term value in cryptocurrency. Bitcoin will disappear and go to zero someday,” said Rogers.
Keeping the cash ready?
According to some experts, it is advisable to keep six-months of liquid cash in a savings or current account to plan for emergency situations. Broad corrections in equity markets particularly- smallcaps and midcaps segments- are getting majority of the brunt. Even the Bitcoin has eased about 10 per cent from its all-time highs.Agrawal from Jiraaf does not recommend investors waiting with cash to make lumpsum investments on expected large market corrections. “As indicated earlier, debt securities look attractive for short- and medium-term purposes. Investors can also look at selective large cap opportunities along with investments in fundamentally strong companies as a long-term strategy” he said.One can allocate between 5-10 per cent of their portfolio to cash and equivalents. The quantity of cash should vary depending on your specific circumstances, which will include things like spending needs, risk tolerance, time horizon for investment, and financial goals and objectives, said Kothari from Augmont.FinEdge’s Gahlaut has another interesting suggestion. Invest the money in an arbitrage fund and start an STP for a 12–18-month duration without over-diversifying your portfolio, if one has spare cash, he advised as the key is to cut out the information clutter and have a strong process-driven investing philosophy so that you can meet your financial goals.
Conclusion
Investment allocation across asset classes is a function of customer’s risk appetite, expected returns, and financial goals. Asset allocation is directly related to the risk profiling and time horizon of the financial goal the person is investing towards. However, there is no set formula of diversification as no one size fits all.Investment Guru Jim Rogers suggested staying invested in stocks for five years. On froth across all major asset classes, Rogers said, “If everybody is making a lot of money, it’s time to get worried. If I were buying today, I would buy silver, which is down 50 per cent from its all-time high,” Rogers said.
Trying to time the market is extremely tough and can be detrimental, multiple studies have shown that maximum loss in returns happens by sitting on the side-lines waiting for the ‘right’ market level to invest, Gahlaut from FinEdge said. “Chasing returns by investing in assets like crypto, or any other difficult-to-understand, speculative, complicated products, would be a mistake,” he cautions.
