The cryptocurrency market is in turmoil. Last week, Bitcoin, Ethereum, Dogecoin and others fell over 15 per cent in value. There are days when billionaire Elon Musk endorses them and then days when he pulls back. A lot of trading in these newest assets is volatile. Investors pulling money out from these assets in panic are perhaps buying equity assets or gold. Last week, equity markets around the world witnessed a sharp jump. Gold prices have gained ground too.
Factors influencing financial markets around the world are not related to interest rates or profits of businesses anymore. They are more about moving money from one asset class to another. There are two sets of investors. The one set is of those who know a lot of stuff. They have access to the latest information in major world economies and markets. They are on top of market cycles and focus on allocating assets based on informed decisions. Institutional investors and high net worth individuals belong to this category.
The other set of investors are people like you and me. You cannot claim to know much. At the same time, you have access to information, but your preoccupation with work relatively limits your abilities to connect the dots. The current turmoil in the financial markets is led by investors who know a lot of stuff. They have dabbled across multiple asset classes like bitcoin, and some of them are either taking out profits or looking to diversify their portfolios.
Diversifying the risk
At every level, diversification of risk matters. You may be an investor with the most risk appetite in the world. You may have access to the latest information and data needed to manage your money. Even then, it is impossible to eliminate risk. You can only minimise it in your lifetime by using your common sense.
The age-old saying ‘Never put all eggs in one basket’ works. It is the best way to protect your wealth. If that applies to a sophisticated investor, it applies to you too. There would be temptations in your lifetime. The value of Bitcoins jumped to $ 30,000 from a few hundreds in just a few years. However, everyone can’t make a fortune and get a multi-bagger instantly. You have to be in the game for a long to seize your opportunity at some stage.
Fixed deposit and other safe assets
Your safe assets include cash in the bank, fixed deposits, money put in public provident fund, Kisan Vikas Patra and other government post office schemes. The government has set up a mechanism to determine the rates offered on these instruments. According to the latest RBI Bulletin, the rates currently offered on these schemes are higher than the formula created based on market-linked interest rates.
That means the government bears the difference of up to 1.5%. That is the difference between the administered rate on these schemes and the market rate. Considering that India’s economy is expected to underperform and see a decline in tax revenue, the government will likely look at that difference as a burden. These rates could go down, too, if lock-downs are lifted and the economy does not grow at the desired pace. You have to think about diversification from below inflation rate returns.
Equity assets
Your money can only grow in equity assets over the long term. Your investment needs to beat the inflation rate. Systematic Investment Plans into exchange-traded funds or diversified mutual funds are your gateway. The National Pension Scheme or the NPS offers market-linked returns. It would help if you took advantage of the NPS’s additional tax benefits and equity-linked returns.
When it comes to equity assets, the motive of businesses is to grow revenue and profits. Share prices follow growth in profits. You have to ensure an adequate allocation to equity assets from your monthly surplus. If you were looking for a suitable time to start, you could meet a financial advisor immediately. There is no right or wrong time to get started with long-term investing. If too much allocation to equity assets is risky, so is inadequate ownership of equity assets.
(The author is editor-in-chief at www.moneyminute.in)