From Director’s Desk | Anirudh Dar

You’ve probably heard of the adage – “Don’t put all your eggs in one basket”. You probably also know what that means. But let us understand a different perspective to this. In financial parlance, this means that one needs to diversify our investments across the 4 main asset classes, which are Equity, Debt, Gold and Cash.

So, why is this necessary?

The answer is simple. All asset classes behave and move differently to each other at the same time. For example, Equities and Gold have an inverse relationship, meaning that if Equities will do well, chances are that often, Gold might not. This is also because Gold is considered a traditional safe haven and each time there is a “risk-off” in the markets, portfolio managers sell Equities and invest in Gold (which drives the price up further, as we have seen in the last few years).

From the end of the financial crisis in 2008, equity markets went on an almost uninterrupted bull run all the way until 2018, during which time Gold underperformed. However, in the last 36 months, Gold has been the best performing asset class amongst all, whereas Equities have struggled. Debt is a more tactical and stable allocation requirement in our portfolio even though of late, there have been some defaults in this category. Having said that, it is important to note that all investments come with some risk or the other – be it capital or volatility risk in equities or interest rate or credit risk in debt.

The two biggest fundamental rules of investment are asset allocation and diversification. In order to make money, one must diversify our portfolios across all these asset classes. Imagine your portfolio has 50% exposure to Equities, 30% to Debt, 15% in Gold and the rest in Cash; the chances are you would have made much more money in the last few years on a portfolio level as compared to someone who was fully invested in Equities. This is because while Equities have fallen about 25%, whereas Gold has risen by almost 50% in the last 3 years. So, while you would have lost money in one asset class, you would have been partially compensated by superior returns in another one.