How To Balance The Portfolio When Equities, FDs, & Gold Are At Their Peaks?

Whether it is equities, fixed deposits or gold, all have performed well in recent years. The Nifty 500 index returned around 16 per cent year-to-date, fixed deposit (FDs) rates have been relatively higher, and gold has also touched record highs. Gold prices, in recent times, have seen fresh spikes due to the demand for gold jewellery for the festive and wedding seasons.

Since all these asset classes have been performing well, what should be the asset allocation strategy? A simple approach could be equities for the long term, FDs for the short- and medium-term, and gold to mitigate the downside risk.

Also Read: Want To Surprise Your Grandchild With A Financial Gift? 4 Things To Consider

Here are the performances of equities, FDs and gold in the last 10 years.

According to data from Geojit’s report, “The Sphere of Market Rotations”, in four out of the last 10 years, Nifty-500 generated higher returns than FD and gold. Likewise, in one out of 10 years, FDs outperformed the Nifty-500 and gold, and in five out of 10 years, gold has outpaced Nifty 500 and FD returns. The Nifty-500’s compounded annual growth rate (CAGR) over the last 10 years has been the highest at around 15.5 per cent, gold 10.8 per cent and FDs 6.7 per cent.

However, in the last one month, Nifty-500 dropped around 6.7 per due to several global factors, including the Middle East tensions, the interest rate cuts by the US Federal Reserve and other central banks, leading to volatility in the domestic market. In contrast, gold rose around 5.0 per cent in the same period, attributed to domestic demand due to the festivities and weddings. On the other hand, the FD rates did not see a drastic change and remained around 7-9 per cent.

In this scenario, proper asset allocation becomes all the more important to ensure returns.

How To Ensure Proper Asset Allocation:

Various asset allocation rules exist, such as the “100 minus age” rule, which suggests that the percentage of debt investments should equal an investor’s age, with the remainder in equities. Another common rule is the 60-40 approach, where 60 per cent is allocated to equities and 40 per cent to fixed-income instruments. Many other strategies also exist. However, most experts recommend allocating around 10-15 per cent of a portfolio to gold for diversification and to reduce the risks from equities, although the latter offers better returns than debt assets.

That said, there is no one-size-fits-all formula. So allocations should be based on individual goals, and risk tolerance. Still, the importance of gold in a portfolio should not be overlooked.

Is Gold A Suitable Purchase In The Current Scenario?

Tapan Patel, fund manager-commodities, Tata Asset Management, says, “The current market environment is very uncertain and is being reflected with high volatility in all asset classes. One may look for a way to provide probable future returns and diversification over high-risk investments, which may grow over time to secure the future.”

He adds, “Investors may look for accumulation on a decline in the prices. The current market environment could favour a strategic allocation in gold as an investment in the portfolio.”

So, allocating a smaller part of your portfolio to gold can significantly improve its overall performance. If you are considering gold this Diwali, remember to explore all the options, from physical gold to sovereign gold bonds and gold ETFs, and choose the one that best suits your needs.