Diversification of Portfolio

Recently I received a query from reader about achieving diversification of the portfolio. Here is the query and its solution.

Hi Asav,
It always said that we should aim for diversification in our portfolio but no one tells how to actually do it.

1. Can you explain or point out some asset classes with negative correlation which will help in maximizing returns and at same time minimizing risk associated. Simply stating, the asset classes should have negative/low correlation to the equity funds I already hold in my portfolio.I am not interested in investing in Debt market.
2. How can one invest in Commodity market.
3. Are there possible ways to invest in Silver as a commodity, just like Gold (as ETF's) as I could not find any silver ETF.

Diversification is very important for any portfolio. Now, in ideal portfolio, there should be some asset classes which have negative correlation in between. The Best Example is Equity & Debt. Equity & Debt both are the 2 Asset classes that have negative correlation in between. Because when the interest rates will be high, Debt Assets will give you excellent returns but as the interest rates are high, borrowed money will be costlier thus businesses will be able to borrow less money and thus businesses will suffer and thus the Equity.

Now when the interest rates will be low, the return from the Debt Assets will be suffered but the Businesses will flourish like anything because the borrowed capital is available at cheaper price and thus businesses will expand more and thus equity will be up.

Another 2 Asset classes which also has a negative correlation with Equity are,

01) Energy (Crude Oil) &

02) Gold

When the Crude Oil prices go high, Businesses will suffer and vice versa and when Investors will loose confidence over the Equity or when the central banks around the world print the money in the economy, they will shift their wealth from equity to gold and vice versa.

So Crude Oil and Gold are the 2 other Asset classes in which you can invest. But well, Here I really surprised by knowing that, why don’t want you invest in the Debt? The ideal asset class is still the Debt only which has negative correlation with equity.

You will think that, I will invest rest of the money in Debt rather than in Equity but well, it’s not advisable by Finance Gurus. According to them, not more than 10% of your over all portfolio allocation should be in Gold. So I think, you can allocate MAXIMUM 10% in Gold but i think for the rest, you should go with Debt only.

Now, let’s talk about Commodity Investment. Well, if you ask me than I Invest in commodity via my ICICIDirect.com, Online Demat account. It’s simple and easy to use. However, you can ask any other broker also.

And at last, well no. Right now there are not any Silver ETF Funds in India like Gold ETFs. So only way to invest in Silver is via direct Coin and Bar purchase or you take the commodity future contract of silver in your commodity trading account.