The BSE Sensex fell by 400 points in the second week of December 2006, reviving memories of the fall in May, when it crashed by more than 1,000 points within a week. The Sensex came down from a high of 13,000 to 10,000 in a month's time.
A major portion of investors' wealth was wiped out by the steep decline and many burnt their fingers, especially, those who had invested only in equities. They are yet to recover from the shock. The proverb that never put all eggs in one basket comes in handy in such times.
This axiom points at diversification of assets, since it reduces risk.
Diversification here means proper asset allocation among different asset classes.
This cuts down the risk of overall negative returns, because when one asset class is performing badly, another might be doing well. What one should note is that he/she should possess negatively correlated assets, i.e. when one asset is in negative territory, other must be in positive.
As we all are aware, there is a negative correlation between the bond market and share market. When the share market witnesses a boom, bond usually does not perform well. For allocating assets to different classes, one should be aware about the various asset classes available today. Unlike the earlier days, when not many choices were available in the market, today we have a wide range of products vying for the investor's attention. For convenience sake, here we are not considering hedging tools such as futures, options, derivatives and commodities.
Cash
Cash is the liquid form of asset with no capital growth. Inflation risk too is high. You can keep cash at your home or in savings bank account.
Fixed interest/debt
Next comes fixed interest securities or debt. These could be fixed deposits with a bank or company or government or corporate bonds. Here the chances of capital growth are poor, liquidity is high. If inflation soars, real rate of return is less than the interest rate. The rate of return is around 8 per cent per annum.
Equity/shares
The stock market is an avenue available for investors who are ready to take risks. In the long term, there are fair chances of capital appreciation. Now-a-days shares offer good liquidity too, because of the T+1 trading cycle.
That it helps you beat inflation is a great advantage. You can also diversify further by investing in various shares. The Sensex gave handsome return of 47 per cent last year and the Nifty's return stood at 40 per cent. Some shares even gave better returns than the Sensex or Nifty. But one should remember that the stock market has given negative returns twice in every seven years.
Property
Property is key to one's asset since a residential house is must for anybody. Some financial planners, however, do not consider residential asset as part of asset allocation strategy since you cannot sell it and go elsewhere to stay.
As we consider property from an investment point of view, it is a good avenue for investors with greater risk appetite and less concerned about liquidity. In the long run, this asset class overtakes all other categories. Property prices in all cities had appreciated by around 30 per cent last year.
Gold & Jewellery
In India, gold has been considered only for making jewellery. The yellow metal was bought and sold whenever emergency arose. Nowadays, it comes with hallmark certification - a step towards gaining more transparency. Gold is highly liquid. That last year it had given returns worth 18 per cent reinforces the fact that it a must asset.
Diamond/gems
These are a neglected asset class in asset allocation plans. In India, they are mainly used in ornaments. At least, diamond is worth considering for investment.
Nowadays it comes with certification ensuring transparency. Though prices of diamonds have hit the roof, liquidity of this asset is a concern here. In foreign countries, people invest in diamond.
Art & antiques
Last but not the least among all the asset classes is art & antiques. These are for persons with high-risk appetite and net worth, as they require a lot of investment. You can definitely invest in works of well-known painters such as M F Hussain.
As far as capital growth is concerned, chances of appreciation are very good in the long run. There are art funds, which collect money from you and buy art & antiques. They sell it on appreciation. But the minimum investment requirement is quite high.
These are the asset classes available in the market today. But still the question remains how much to invest in each asset class. You should consult a certified financial planner before developing such a strategy.
