Mutual funds: Exiting equity now may lead to missing out on any recovery subsequently

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Published: April 15, 2020 6:00 AM

As of February 29, 2020; equities outperformed gold over the trailing 10-, 15- and 20-years, delivering annualised 10.39%, 13.89% and 12.0% respectively compared with 8.16%, 12.59% and 11.49% respectively delivered by gold.

Equities have outperformed other asset classes over long holding periods, despite experiencing similar corrections in the past. Equities have outperformed other asset classes over long holding periods, despite experiencing similar corrections in the past.

Should I move my funds from equity to gold as I am losing a lot of money in equity?
—Deepak Kumar
Equity markets have corrected sharply on concerns over global growth amid the coronavirus outbreak. Markets have witnessed significant drawdowns in a short span of just about a month. Equities have outperformed other asset classes over long holding periods, despite experiencing similar corrections in the past. As of February 29, 2020; equities outperformed gold over the trailing 10-, 15- and 20-years, delivering annualised 10.39%, 13.89% and 12.0% respectively compared with 8.16%, 12.59% and 11.49% respectively delivered by gold. However, with the recent sharp drawdowns in March of about 35%, equities are now underperforming gold over the trailing 10, 15 and 20-year periods (delivering annualised 6.86%, 12.19% and 11.01% respectively compared with gold’s 9.21%, 13.19% and 12.11% respectively) as of March 31, 2020.

Gold is seen as a safe-haven asset, which investors turn to during times of increased risk aversion. You may have some allocation to gold (5-10%) from an asset allocation perspective to benefit from diversification. You may continue being invested in equities if you have a long investment horizon, as exiting at this point might result in missing out on any subsequent recovery.

Suggest good investment options which can cater to future financial requirements of my newborn.
—Bablu Kumar Gupta
For portfolio construction, asset allocation-based approach (mix of equity and debt) should be followed. Longer 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 over the long term. It is advisable to add some international exposure to your portfolio. As your goal approaches (2-3 years before), shift allocation out of equity into arbitrage funds, as they more tax-efficient than fixed-income funds for shorter holding periods. It is advisable to invest through SIP route. To attain a higher corpus for your goals, you should increase the SIP investment in line with growth income. Take a term insurance policy in place to protect your goal in case of any untoward incident.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com

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