QUOTE OF THE WEEK:
The general remedy of those who are uneasy without knowing the cause, is change of place: Samuel Johnson An investor may think that he doing everything in his capacity to make sensible investments, but he may still not get the desired results. In such a case, he should try to diversify his investments among different asset classes to maximize his gains or offset his losses. This way, he would still have presence in the markets but would be limiting his exposure to equities alone.
A PICTURE SPEAKS A THOUSAND WORDS...
Diversify equity exposure across sectors
Asset allocation is the process of allocating one’s funds across different asset classes such as equities, commodities, debt, gold etc. The idea behind this practice is to ensure a diversification among assets so that risk is limited. Investors can assess their risk appetite and diversify their funds accordingly. They can opt for mutual funds which enable exposure to different asset classes through a single scheme. In the aftermath of the 2008 recession, a trend was observed where investors globally pulled their money out of risky investments such as equities and commodities in times of economic uncertainty and parked it in safe haven investments such as gold.
Can Correlation between Asset Classes Boost Portfolios Returns?
If we look around us we will notice that our life runs on a basic principle that says every incident, no matter how big or small, has an impact on other things. Even something as big as a war can occur merely because of a difference of opinion. The same theory applies to our investments. Understanding the correlation between investments can help you gain more out of them.
Asset class and market correlations
The stock market experiences constant ups and downs. Various asset classes behave differently in different market scenarios. If you fail to understand their functioning, you may lose the chance to make good returns, or worse, lose the gains you have already made. When investors feel the economic situation is uncertain, they move away from risky assets such as equities and commodities and turn to safer and less risky ones such as gold and bonds. The recent spike in gold prices in the wake of the 2008 financial meltdown is one such example. Read on to understand how understanding asset class correlation can help you.
Correlation of asset classes
Different asset classes have correlations between one another which you need to understand. To understand them, you need to study them over a period of time and identify the patterns. If you observe that two different asset classes fall or rise together for the same reason, they are positively correlated. They will be negatively correlated if you find out that an asset class constantly falls when another one rises. Some correlations such as gold versus dollar have been a standard gauge of market situations. There are times when gold moves up, the dollar is seen falling as both the investments are safe ones. When investor risk appetite shrinks, both tend to rise as investors pull out their money from risky investments. We also often see that when international crude oil prices fall, the Indian markets tend to rise. This is because the cost of importing oil, a major source of expenditure for our country, reduces.
Combining different asset classes
To make your investment portfolio work best for you, it is essential to diversify your funds among different assets. One should never put all their eggs in one basket. By diversify your investments, you ensure that your risk is also reducing. So, in the event of one asset class suffering, you will stand to benefit from the other one. However, you must keep your eyes on the changes in correlation between different asset classes so that you do not lose out on your gains.
Importance of asset classes in portfolio
You must understand that asset classes determine the profitability of your investment portfolio. All you need to do is to distribute your investments in a way that can balance the risk-return factors of your portfolio. Understanding the relation between different asset classes is your key to build the perfect structure for the investment portfolio.
Study the past
The best way to understand the correlation between different asset classes is by tracking their past performance. Study how two different asset classes have affected each other in the recent past and what factors have caused them to change, if at all they have.
Whoever thought stocks and financial services products are the only options for one to invest money, think again. You can also park your funds in avenues such as Art, Real Estate and Infrastructure.
Include Real Estate and Infrastructure in Your Portfolio
The main aspect of a successful investment portfolio is its asset allocation. The more you can diversify your investments, the better return and safety you can expect from it. One of the main investment options for investors has always been real estate. Real estate has occupied a significant amount of presence in any investment portfolio for years. Moreover, every country is putting more efforts in their infrastructure these days which has made it a great investment option for investors.
Both options are great for long term investors and have some similarities and differences. You must know them well to diversify your portfolio accordingly.
Things to know
When someone builds their investment portfolio they always look for things that can stabilise their portfolio.
Real estate has always been an investment option that can balance risk with good profit.
Infrastructure needs funding and governments all over the world look forward keenly to investment in this sector.
Infrastructure has not witnessed heavy investments in the past as its true potential was not visible. Today, with all the improvements in the sector, investors find infrastructure truly promising.
More corporates too are investing in infrastructure as they have a huge funding.
General investors are still sticking with real estate but the situation is slowing changing. Individuals are also warming up to the idea of investing in infrastructure.
Optimising your portfolio with real estate and infrastructure
Every big fund management company includes infrastructure as an investment product in their portfolios. Some experts consider them as better investments than real estate due to higher returns and safety.
These products hold a sizeable amount in a portfolio. Some funds actually arrange the portfolio with over 60% occupied by real estate and infrastructure. However, they still choose real estate over infrastructure as they already have enough knowledge and experience about the sector.
Investors should derive the right mix of real estate and infrastructure investments in their portfolio depending on their goals. These investments should mainly be considered as portfolio balancing options.
Beyond The Usual Investment Options
With these unstable market situations, investors are stepping back from their obvious investment choices such as equities and commodities. Investors are now looking at tangible items for investments such as art, wine, stamps, gold, books and other solid items. These are safer investments in these uncertain times.
Investment in art
To invest in art, one needs proper knowledge about the field and its artists. You can invest through auctions or online portals. Maintaining art for a longer time requires special care so you should make arrangements for the same. Conduct a thorough research on the artist, the art, and the time it was created.
Investing in art is a one-time investment and gain option. You can only sell it once, therefore, you cannot have anything other than capital gains. However, the value of art increases over time so it is more of a risk free investment. It may be some time before an art piece sells but it is surely worth the wait.
Investment in wine
Wine is another great investment option. Wine factories do not sell wine directly to the public. You have to buy wine from a cellar and thus it is important for you to choose someone who can provide you with good quality wine. You can buy wine from online stores and preserve them too. Make sure you choose a wine that is popular.
The best thing about investing in wine is that you do not face losses even if the market falls because it is a physical item. You may know that the quality of wine improves with time so the price will only rise. That makes it a very safe investment and great way to balance your portfolio.
Investment in gold
Investing in gold is the safest of all investments. With the current market situation, every investor is buying gold which is, in turn, driving its prices higher. The price will continue to rise as investors rush to safeguard their wealth from the global financial turmoil. Moreover, gold is considered as a hedge against inflation, its value rises along with a rise in prices. This makes the yellow metal an ideal investment option in such difficult times of rising prices. . You can buy gold coins or gold bars and store them. You can also invest in gold exchange traded funds and certificates which let you own gold without the hassle of holding it in physical form. Do not buy gold jewellery unless you need to as you will have to pay extra for making charges and taxes. Bars and coins can be stored in bank vault easily.
TERM OF THE WEEK
Bailout
It is an illegal act in which corporate monies are provided to shareholders payments which are subject to tax at desirable capital gains rates.
IN THE NEWS THIS WEEK:
In a severe stand taken by the Supreme Court on the issue of 2G licenses, the apex court on Thursday cancelled 122 licenses issued to 11 Telecom operators since Jan 2008 during the tenure of former Telecom Minister, A. Raja. This might come as a blow to the sector, which was already riddled by corruption charges against various ministers and company executives.
122 new 2G licenses cancelled
CALCULATORS
You are all set to invest with your funds in place and your time horizon chalked out, but don’t know where all to park your money? The calculator on the link below will help you allocate your funds depending on your risk ability, time horizon and amount. Happy investing!
Best suited Asset Allocation
ABOUT FLAME
FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL initiative to promote financial literacy amongst the masses in order to make them an integral part of India's spectacular growth story.
In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation's economic prosperity. Financial inclusion has been quite high on the governmental agenda, given its emphasis on widening the Banking & Financial services network across the country. IIFL's FLAME initiative stands committed to complement this effort by helping common people gain financial growth and security though better awareness and education on the variety of financial products while avoiding the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes.
Our objective is to light a FLAME, as the name suggests, which will set ablaze a chain of FLAMEs across the country. The new-found light of knowledge will undoubtedly dispel the dark clouds of financial illiteracy and ensure the bright sunshine of financial growth and prosperity.
This portal is but one of the various IIFL initiatives that would be part of FLAME.