Recently in Tuscany, Italy, a hoard of ancient coins were found buried, probably dating back to the 1st Century BC. These coins were hidden by the owners to keep them safe during war.
While our current times may not be so turbulent, we still face some geopolitical turmoil. We may not have to dig holes to keep our money safe, but we still need to carefully evaluate our finances.
“Geopolitical situations also provide opportunities for investors to take a tactical allocation approach,” says Rahul Bhutoria, Director and Founder, Valtrust- A Multi Family Office, putting a sensible touch in a world seemingly gone mad.
To illustrate, if there is a conflict in a certain region, it may cause a short-term dip in the markets, which could be seen as a buying opportunity for investors.
"The dynamic nature of the market will always make certain asset class attractive, while some might lose shine for a certain investor base,” says Bhutoria.
In order to get the best returns from the emerging asset class, a constant monitoring of the market dynamics is must. One has to be timely responsive to these dynamics and understand know-hows of various asset classes.
So let us look at the various asset classes that the common investor may look at for his/her investment during these turbulent times. We have only focussed on asset investments that are easily available and (relatively) liquid. Thus we focus on equities, debt and gold and exclude art and real estate.
Equity is a high-risk, high-return asset class that can be affected by a wide range of factors, including economic and political developments, market sentiment, and company-specific news. While equity investments can provide significant returns over the long term, they are subject to high levels of volatility and markets news (especially when bad) and can be challenging for investors to navigate.
Debt is a lower-risk asset class that typically provides lower returns than equity. The risks associated with debt investments can vary depending on the type of debt instrument, but in general, investors should be aware of another series of factors such as credit risk, interest rate risk, and inflation risk.
Gold has been in the spotlight over the last few years as a hedge and safe haven asset. While gold prices can be affected by a variety of factors, including economic and geopolitical developments, inflation, and currency movements, it has historically been seen as a way to preserve wealth during times of uncertainty.
Anurag Jhawar, Partner Family Office, Upwisery Capital Advisors LLP, gives us an idea of how asset classes have seesawed in just the past 12 months.
The rising rates during the past year have weighed down on equity, allowing debt funds to take centre stage and products like Target Maturity Funds started gaining popularity.
Despite recent changes in the debt space due to removal of indexation benefit, it still remains an important asset class for allocation purpose. The debt universe typically would consist of debt (ETFs/Index) funds which are duration based and accrual based - Gilt ETFs with varied maturity, Target Maturity Products investing in SDL, PSUs, G-Sec and liquid category offerings.
Finally, in the past calendar year there was an unprecedented buying of gold from all major countries. Countries were seen to be building substantial gold reserves. Also, many countries have started to move away from dollars and are entering direct currency trade relations, which reflects the weakening status of the USD as safe heaven and hence positive for gold.
So what is the takeaway?
Experts are almost unanimous – diversify.
“Thus, exposure to equity, debt and gold with the right allocation can help beat volatility. A multi asset allocation with staggered investment approach should be the ideal way in the volatile year ahead,” says Jhawar.
“An investor apprehensive of volatility can adopt a multi-asset approach i.e. spreading investments across various asset classes – equity, debt, commodities to name a few. In such an investment, even if there is an adverse development in any of the asset class, the entire portfolio will not be impacted adversely,” says Chintan Haria, Head- Investment Strategy, ICICI Prudential AMC.
Experts point out that some AMCs (asset management companies, the parents of MFs) offer multi-asset funds, the allocation to various asset classes is actively managed basis the changing market environment through the holdings in Index funds / ETFs of Indian, international equity, debt, gold ETFs.
The active rebalancing between the asset classes ensures that an investor gets to tap into the attractive investment opportunities presented by various asset classes. As a result, over the long-term, such an approach tends to generate superior risk adjusted returns, say experts.
But yes, here too the investor may take the diversification theme to reduce risk a bit further. Investors should also consider diversification within each asset class, such as by geography, sector, or company size. A balanced portfolio can help reduce risk and optimize returns over the long term.
Most important, before getting into the asset allocation game the investor has to look inside and know his/her priorities, timeframe and risk taking capabilities.
An investor's approach to the various asset classes will depend on their investment goals, risk tolerance, and time horizon. In general, equity investments are best suited for investors who are looking for capital growth and appreciation over the long term. Debt investments, on the other hand, are more appropriate for investors focused on capital preservation and looking for a reliable income stream.
Gold can be used as a hedge against inflation and market volatility, making it a useful addition to a well-diversified portfolio.
Alternative investments, such as real estate and private equity, can provide higher returns but also come with associated risk and low liquidity, as a side information bar on the other asset classes even if they may not be suited for you.
“While it is impossible to control external factors such as wars, there are several steps that retail investors can take to mitigate risk,” says Bhutoria.
One way is to diversify their portfolio across different asset classes and geographic regions (either by investing via the Liberalised Remittances Scheme route or investing in funds in India that have exposure to the offshore market. However, for the latter there are inflows limits by SEBI, and the taxation will be at the investor slab rate). This can help reduce the impact of any single event on the portfolio's overall performance.
Next, investors should consider maintaining an emergency fund of liquid assets that can be accessed quickly in case of unforeseen circumstances. Position sizing and regular monitoring of the portfolio can also be useful tools in managing risk.
Investors should stagger their investments, especially in equity investments. The time period over which the investment will be staggered can be long or short based on the risk appetite and market conditions.
“Finally, it is important to stay informed about global events and the potential impact they may have on the portfolio,” says Bhutoria.
How much from here on?
Experts note that crystal ball-gazing is difficult as to how much of an upside (or downside) the asset classes may give till say the end of the year.
Market dynamics are constantly changing and can be influenced by a variety of factors such as geopolitical events, economic indicators, and company performance.
“However, over the long term, certain asset classes such as equities have historically generated higher returns (albeit with higher volatility) compared to fixed-income securities such as bonds,” says Bhutoria with the caveat that past performance is not indicative of future results and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.
Manik Kumar Malakar is a personal finance writer.