Many people go for geographical diversification to make their investment portfolio more steady. However, incidents like the spread of a deadly wave of a new variant of COVID-19 virus in China, and prolonged war between Russia and Ukraine have pushed many economies worldwide on the brink of recession. In such a situation, even a well diversified investment portfolio of an investor may get affected as a global economic downturn would also affect performance of Indian equities.
So, how to safeguard your investment portfolio in such a situation?
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Nidhi Manchanda, Certified Financial Planner, Head of Training, Research & Development at Fintoo mentions some of the investment options that will help to protect your portfolio:
Gold acts as a natural hedge against inflation and economic downturn situations like a recession. The different ways or options available to invest in gold,i.e, Physical Gold, Digital Gold, Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds. It is recommended to not have more than 5-10 per cent exposure to Gold in your portfolio for hedging purposes.
It is further suggested to invest in gold ETF and gold mutual funds to fulfill short-term goals as they offer good liquidity, investment at low cost, and less volatility. For long-term investment in gold Sovereign gold bonds are recommended as they have a lock-in period of 5 years and proceeds are tax-free if held till maturity after 8 years. SGBs additionally offer 2.5 per cent interest paid semi-annually and the interest is taxed in the hands of the investors as per their applicable tax slabs.
Commercial Real Estate
Commercial Real Estate generally performs stable during economic downturns, but this asset class requires high investments and recently a new form of investment has taken popularity in this asset class which is Real Estate Investment Trust (REIT) which invests in high-rated commercial real estate properties which are managed by professionals. REITs provide periodic payments to their investors along with capital appreciation. Also, the minimum investment amount in REITS is Rs 10,000 -Rs 15,000.
Target Maturity Funds
In the current rising interest rate scenarios and probable coming of recession, investors will to invest for medium to long-term can lock-in the current elevated yields by investing in Target Maturity Funds. Target Maturity Funds are debt products offered by mutual funds that invest and track a predetermined benchmark and have a predefined maturity. Suppose an investor invests in a TMF maturing in 10 years at 7.25 per cent yield, investors will relatively get close to the same yield of 7.25 per cent before expenses and taxes. It is to be noted that TMF is held for more than 3 years and is taxed at 20 per cent with the benefit of indexation making it attractive for investors in higher tax brackets.
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There is no proof of recession proof stocks, companies or businesses. But there are sectors that do not see many downfalls during the times of recession or economic downturns. This is because their products and services tend to be non-discretionary i.e. people and businesses have to buy them even during a recession.
Such sectors are mentioned below:
- Consumer staples/FMCG
- Discount retailers
Additionally, keep these points in mind while making new investments or taking decisions regarding existing investments during times of recession:
Continue your SIP
Do not stop your mutual fund SIPs during times of recession. This could be justified by the fact that the benefit of Rupee Cost Averaging through SIP in deep market corrections or bear markets. With a cumulative investment of Rs 3,00,000 through monthly SIP during this phase (January 2008 to January 2013) you could have accumulated a corpus of Rs 3,95,000. The SIP returns (XIRR) during this period was more than 10 per cent, significantly higher on a post tax basis than bank FD, which many investors thought was a better investment during the worst financial crisis of our times.
Avoid lump sum investments in equities
Park your funds into a liquid fund and invest in a staggered manner into equity mutual funds through a Systematic Transfer Plan (STP).
Also Read: Multibagger Stocks: For how long to invest? What to do if a stock fails to perform?
Remain well diversified
Keep your investment portfolio diversified as data shows that no asset class is the best asset class as none of them performs consistently over a track of long period. Each asset class tends to perform differently at given points of time and economic cycles.