Gold plays an important role as a diversifier in a portfolio due to its less than perfect correlation with other asset classes.
I am a central government employee and an NPS subscriber. My NPS investment value has recently got eroded by one-third due to current Covid-19 triggered stock market volatility. What I should do to hedge the loss of my NPS investment? —B K Gupta
For portfolio construction, an asset allocation-based approach (mix of equity and debt) should be followed as it is one of the key determinants of the portfolio’s performance. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity, which have the potential to deliver relatively higher returns compared to fixed income over the long term. Ideally, the portfolio mix should be in line with your risk appetite. To lower the risk of your portfolio, you may shift to a lower risk portfolio which would have a higher allocation to fixed-income instruments.
You may continue with the current NPS scheme subject to your risk appetite and investment horizon. In case, your investment horizon / time to retirement is greater than seven years, you may continue to hold your NPS investments.
If your current overall equity allocation is higher than that warranted by your risk profile or investment horizon you may opt to move to the lower equity scheme LC 25 (max equity 25%) or move entirely into Scheme G by changing your ‘scheme preference’, which is allowed once a year. To avoid realising losses, it would be advisable to switch to more conservative options once the value of current investments recovers to its original value.
Is it a good time to invest in gold ETFs?
Gold plays an important role as a diversifier in a portfolio due to its less than perfect correlation with other asset classes. Given the uncertain times, increasing exposure to gold seems a lucrative choice given its safe-haven status. However, gold has already rallied sharply in the past year due to uncertain-ty in markets amid the US-China trade war and Brexit fears. Equity markets could recover sharply in the face of any significant positive news, which could lead to investors selling gold and re-ent-ering equities which are now attractively priced. This may weigh down gold prices. You may restrict the allocation to gold to 5-10% of your overall portfolio.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org