While equity and gold provide opportunities for high alpha creation, the fixed income returns from debt products offer the necessary sturdiness in the portfolio.
By Tushar Bopche
The auspicious occasion of Ganesha Chaturthi is upon us. This ten-day festival is a celebration of new beginnings, prosperity and achievements. Devotees worship Lord Ganesha with heartfelt enthusiasm and present to him different kinds of offerings. The most sought after sweet amongst all is modak; a favourite of Lord Ganesha.
Just as there are different varieties of modaks with traditional fillings of mava, coconut and chana-dal, and new additions such as chocolate and dry-fruits ones, I believe an investor also should have diversification in their portfolio to please the god of prosperity.
The reason is simple. Variety adds multiple streams of influx which perform differently at different times. Diversified asset classes reduce volatility.
Why is diversification across asset classes important?
The following table demonstrates the behaviour of single asset and multi-asset investment
Once we have fixed our long-term goals, we should divide our investment into Equity, Debt and Gold. While equity & gold provide opportunities for high alpha creation, the fixed income returns from debt products offer the necessary sturdiness in the portfolio.
Remember, no asset class performs all the time. There are fluctuations. Smart investors regularly review, rotate and update their asset allotment.
If we look at the table below, we can see how different asset classes have performed and provided returns in the last three financial years.
Source: Bloomberg Data for last 20 fiscal years. Mar ‘98 to Mar ’20; for Debt –nseindia.com
Proxies used for asset classes: Equity –NIFTY 50, Debt –NIFTY 10 year benchmark G Sec, Gold -Spot Rate Rs /10 Grams.
Investors usually tend to lean towards the asset class, which has performed well in recent years. We should avoid such biasness. The data mentioned above with respect to the annual percentage returns given over the last three years clearly shows that the ranking of different asset classes such as Equity, Debt and Gold keeps rotating and all of them have outperformed each other at different times.
A prudent investor makes sensible choices while creating their portfolio and diversifies the investment across each asset class. It enables the investor to capture best performances consistently over the years and reduces over-reliance on a specific asset class.
Diversification of assets is like a box of multi-flavoured modaks; when offered sincerely, it gives multi-fold returns and blesses us with security, wealth and happiness.
May Lord Ganesha remove obstacles and bring prosperity to everyone.
(The author is Product Head – AUM Business, YES SECURITIES)