Since the second half of 2003, we have seen the longest bull run in the Indian equity markets. Investors created significant wealth over these years and in the process forgot the basic principle of investing diversification.
Although we all believe that investment in equity is the best tool to counter inflation and believe that growth will take place over the long term. In India, short term jolts can be severed and can take away significant part of the gains. The last six months have forced us to rethink the mistake that many of us made, namely putting most of the money in one asset class.
Alternative investing is an effective diversification tool that has been much talked about seldom practiced, especially in a buyout market. It’s the golden rule of investing and is a critical part of a thorough financial plan to appropriately allocate assets that suits one’s personal objective, risk tolerance and time horizon. For most a mix of traditional investments such as stocks and bonds is a suitable approach. However, more affluent and informed investors should also consider alternatives investments further broaden their portfolios. The three broad ways by which one can diversify one’s portfolio are: asset class diversification, strategy diversification and geographic diversification.
The most common and traditional firm is diversifying across various asset classes, such as equities, fixed income, real estates, commodities like bullion and crude and so on.
However many investors will readily sacrifice this discipline when a particular asset is faring exceedingly well. As a result their allocation becomes distorted.
There are deducted products that offer great investment opportunities across various asset classes and a few of them also hybrid structures that combine strategies and work well from the portfolio diversification perspective.
Diversifying your portfolio across various strategies is another way to de-risk it, especially when you’re principally bullish on a particular asset class. This helps you, the investor participate in the same market through various products and strategies that diversify risk. For example a direct equity investor must also consider options like diversified equity mutual funds, thematic funds, portfolio management service and hybrid structured products, depending on his specific risk profile.
However one of the important in the current scenario is to diversify the portfolio geographically across economies worldwide. As we all know different economies have different growth cycles and different times, which keep the balance in the portfolio intact.
It had been a distant dream for many Indian investors; however now investing in overseas economies is simpler and seamless. These investments can be made in two ways. First, the reserve Bank of India allows Indians to invest up to $200,000 a year in foreign markets. This allows investors to buy into foreign funds that can be further diversified into various funds, based on the investor’s objectives. The other route is to invest in mutual fund schemes in India that invests up to 100% of investor money in foreign funds. This is perhaps the most convenient way to invest in foreign equity markets. In such investments since investments are made in local funds which invests in funds abroad, the level of transparency is very high.
It is imperative to understand that there are no guarantees that any particular alternative investment will achieve its objectives, generally profits or avoid losses. In addition alternative investment often differ in significant ways from traditional Investment and carry their own set if unique risks that should be clearly understood. Certain alternate investments may increase risk, be illiquid or may not provide periodic valuation information to investors. This is true, for example of investments in real estate and art.
The important step is to determine which alternative investments make sense in your unique situation. Every alternative investment is different. As a result, it is to be expected that specific investments will have differing effect on portfolio diversification. To compound this complexity, the sheer number of investment choices can be staggering.
While various alternate investments have different levels tend to be more modest and robust and will also be less volatile in the long run.