Things to keep in mind while investing in FDs, gold

With the Hindenburg report firmly in the rear-view mirror, Indian stock markets continued to slip despite a growth budget and generally improving economic sentiment. Last week has been particularly edgy with six straight days of the Sensex slipping following global cues and monetary policies of the RBI and the US Federal Reserve. What seems to be worrying investors is persistent high interest rates with more in the offing (notwithstanding bank fixed deposits coming in vogue as senior citizens make a beeline for their local branch). This is largely on account of a flight to safety even if gold has not performed as one would have expected. Or is it?

Anecdotally it may be so but returns tell an interesting story. For the past six months, gold (GoldBeeS ETF is representative of investment into gold) has returned 7.19 per cent while NiftyBeeS returned -0.14 per cent and the local NASDAQ100 ETF returned -2.82 per cent. Stretching this to the year, GoldBeeS was up 9.7 per cent while NiftyBeeS was up a mere 5.9 per cent and NASDAQ100 ETF was down 4.56 per cent. The longer term 5-year picture is equally fascinating with returns being 75.6 per cent, 80.85 per cent and 86.42 per cent, respectively (source: Google Finance).

This data seems to indicate gold, the flight to safety asset, is a good investment and, perhaps, potentially lower risk as well. But there are a few issues investors should consider while throwing their lot either into bank fixed deposits or gold (ETFs, gold bars, gold deposits or even sovereign gold bonds). First, will this trend continue? And for how long? After all, we have always been told equity gives the best returns.

Data is always a reflection of current times rather than some long-term trends which is why a lot of traders use indicators like ‘moving averages’, Bollinger Bands and other exotic lines on charts. Short term data can lead to mistaking a short-term trend for longer term lacunae. This is also the case with current equity and more so, the bond market.

In the long run what can work is diversification, which ensures at any point in time some part of the portfolio is always performing. What this in turn does is prevent portfolio drop, to an extent. For example, a 20 per cent drop in the portfolio requires a 25 per cent return just to get one’s capital back and recoup losses, let alone getting returns. Preventing this 20 per cent drop ensures better return in the future as well – this is essentially what managers call risk management.

Secondly opportunity: when components of the portfolio are down then it is time to buy and, conversely, sell when they are up. In the current market dip, the correct decision would be to selectively improve those components of the portfolio which are not giving expected returns (assuming the investments have been selected well). While the strategy is good, selective bargain hunting is something investment advisors also recommend enhancing portfolio returns or even to manage risk.

A portfolio thus selected i.e., diversified (beyond equities) and managed by appropriate rebalancing, is a popular strategy to mitigate stock market risk. A word of caution: Equity + debt is no longer sufficient diversification. One needs to have very weakly correlated asset classes like gold, REIT (real estate investment trust) or other commodities or InVits (which include roads, airports, power plants) as diversifiers.

Lastly, when attempting to diversify one’s portfolio, it is prudent to do thorough research or, take the assistance of a Sebi registered Investment Advisor. Caveat emptor.

(The writer is partner at Infinity Alternatives)