Conservative asset classes- Cash & Gold

Cash, which had become a forgotten asset class, is regaining its importance since the beginning of the Coronavirus pandemic. The current health crisis is bringing up questions about the need for having emergency funds and liquidity funds. Typically, personal finance specialists advise three months of your fixed expenses (such as rent, food, travel, EMIs, etc.) to be kept as emergency fund and additional three months of fixed expenses as liquidity fund. However, if we look at the current scenario where the health insurances are not covering some of the expenses incurred during the COVID-19 treatment and there is severe job crisis in major parts of the world, keeping only six months of cash reserve doesn’t seem to be adequate. Having said this, hoarding cash is not appropriate as well. Reserve banks across major economies have slashed interest rates severely in the past six months, which means you wouldn’t earn anything if you keep all your money in the banks. Currently, established commercial banks like SBI give you an interest rate of 2.7% p.a. on your savings account while on the higher side, IDFC First bank gives around 7.0% p.a. (Quick fact: IDFC First bank currently pays the highest savings account interest rate among the Scheduled Commercial Banks in India because the bank is looking at shifting its focus from corporate banking to retail banking). The recent failures of cooperative banks like PMC Bank and Scheduled Commercial Bank such as Yes Bank has resulted in a severe trust deficit in the banking system among depositors. However, thankfully, things aren’t that alarming in the banking sector yet. It is interesting to note that the depositors are moving to “safer” banks such as HDFC Bank. (Quick fact: HDFC Bank’s deposits aggregated to approximately ₹ 11,89,500 crore as of June 30, 2020, a growth of around 24.6% as compared to ₹ 9,54,600 crore as of June 30, 2019). So, the question remains! How much cash reserve is enough? Well, according to me, money should be segregated and invested in various asset classes. But, investing in any other asset class should start only after your bases are covered, i.e., you have sufficient emergency fund and a liquidity fund to withstand any financial or health emergencies. Bottom line: you can choose how much of cash you require in hand at all times, but do not forget to have it!

Gold, the “safe haven”, never seems to disappoint in distressing times! There is a reason why gold is so popular in Indian households. It has a dual purpose; one of course is its ornamental value for men and women alike and second is its ever-increasing price during a crisis which results in gold being treated similar to a security deposit. Gold has a negative correlation with the equity markets which makes it a great hedging instrument and seemingly a must in all portfolios. One can invest in gold in different forms - buy gold jewellery, gold coins, gold bars in physical form and Gold Exchange Traded Funds (ETF) and sovereign gold bonds (SGB) in the paper-form. There are gold mutual funds as well, however, they are 'fund of funds' which further invest in gold ETFs. Personally, I prefer gold in its paper form as it is cost effective and doesn’t have the usual storage related issues of gold, but I know my mother would never agree with me! Some popular asset managers including well-known investors such as Warren Buffet have known to suggest gold as a useless instrument and thus, gold in a portfolio should be restricted to less than 5.0% and if possible, should be avoided altogether. There is a study which shows the optimal portfolio allocation for gold to be around 20.0%. Well, I come from a middle-class background and I know we already have limited resources to invest after all our expenses and hence, our portfolio allocation in gold could be higher than 20.0% sometimes and honestly, it is really alright to do so if that’s what you are comfortable with. Bottom line: One must remember that gold should be only treated as a hedging instrument and not as a return-providing asset due to constant fluctuation in prices. The percentage of allocation depends on your personal preferences and ideally can range between 0% to 20.0%. (Quick fact: Since gold went to nearly ₹ 48,000/- per 10 grams and due to lockdown restrictions, people are not investing in physical forms gold and with the result the gold import in India has drastically reduced in the current quarter.)

Disclaimer: We are not SEBI registered advisors, so please consult your SEBI registered advisor, before taking any decision and we are not responsible for any loss or profit. Above is for educational purpose only.