What do you think about when you hear the word “investing”? Stocks? SIPs? Equity mutual funds? All of us flock to these instruments with visions of supplementary income, building a retirement plan, or even achieving financial independence (a.k.a “seeing the world” or “opening my own microbrewery”).
However – these instruments depend heavily on the market’s performance. And while their returns look promising, they can swing unexpectedly between ‘exciting’ and ‘worrying’.
That’s why it’s important to also invest in more stable and safer items – instruments that aren’t as dependent on the market, but still hold great value in your portfolio. Instruments that have a low correlation to the market’s performance.
Welcome to the world of Low Correlation Assets – we’re talking about government-issued bonds, cold gold, and even hard cash. (Account balance works too; we’re not picky about cash-stuffed mattresses).
These assets don’t always boast super-high, inflation-beating returns. But during times of economic uncertainties (like right now), they are the ones that remain largely stable.
Shouldn't my investment mantra be "growth growth, growth"?
Yes and no.
While your idea of investing is growing your wealth and consistently reaping positive returns – it’s the market that gets to crush or lift your dreams between 9:15 a.m. and 3:30 p.m. every day. The Rs. 1,000 you invested today could become Rs. 1,200 tomorrow; which could fall to Rs. 800 the day after.
Consider the recent, sudden fall in the markets. It shows us how delicate investment returns can be in the face of recession and black swan events. Some of us are even witnessing a complete wipe-out of investment gains made in mutual funds over the past 3 years. Ouch!
But it’s exactly during these times that low-correlation assets shine bright – they help soften such blows by serving as a safe-guard against drastic depletion of wealth during falling markets.
That’s why, it’s okay to have gold locked away in a bank locker or have cash stashed away in mattresses and pillows. As long as the IT department knows about it, you’re probably doing yourself a favour.
Sooo I should just go out and buy gold?
Again, yes…and no. There are more options.
Take Gilt Funds for instance. These are funds that invest only in debt that’s backed by a sovereign (government) guarantee. They are issued by the RBI on behalf of the government and do not invest in corporate bonds. Which means their value doesn’t depend on corporations being able to pay their debts. No points for guessing why they’re so stable.
Fact is, we undervalue such assets when the markets are doing well, because their returns pale in comparison to market-linked instruments. If you’ve followed gilt funds or even gold prices over the past few years, you may feel like they have underperformed and not delivered the returns you’d want from a typical “investment.”
But look at any graph now and it’s clear that they are doing better than market-related investments.Source : Value Research Online
In the above chart (spanning 5 years), you can see that the HDFC Gold Fund has surged every time the equity markets have corrected. But when the equity market was surging, the HDFC Gold fund showed a more benign (stable) performance.
Then there’s the HDFC Gilt fund – which not only shows returns that are safe and steady, but a better-than-inflation return even at its worst point of entry!
And that’s what makes it worth slotting such assets into your portfolio – you’re relatively covered against the impact of a recession or unforeseen market falls.
GILT... FUND... EVERYTHING
No! No! It’s all about balance. Talk to your financial advisor to work out how you should split your investments between risky, relatively safe and super-safe low-correlation assets.
And while we can’t give you a broad suggestion for the first two, we can advise making gilt funds and gold a part of your investments. They have the advantage of not being as connected to the markets, and are thus more stable.
Of course, you can also include such assets outside of your ‘investment portfolio’. Think back to our first blog about building an emergency fund. You could hold this entire amount (worth ~6 months of your salary or 10% of your portfolio, whichever is higher) purely in the form of low-correlation assets!
Yes, introducing such assets into your portfolio can reduce the upside for you to a certain extent, but think of it this way: When the market is volatile (like in recent times), which asset would you want to liquidate to buy into a steadying equity market?
Gold, gilt funds and government-issued bonds are fairly liquid and give you the leverage to take advantage of market lows. So while it may seem like these assets don’t offer supernormal returns, they certainly make for an important part of every portfolio. Some might even say they’re worth their weight in gold.
This is a companion discussion topic for the original entry at http://jupiter.money/resources/how-gold-and-gilt-funds-can-help-you-hedge-market-bets/