A Unique way to diversify your portfolio

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Final year of BBA in finance

9:30 AM, 1st lecture of portfolio management 

Professor entered the classroom and the very first thing he wrote on the blackboard was ‘Diversification is the key in investing.’

Well since the early days, we have been taught to maximize returns with minimizing risk. The later component is taken care of by diversification.

Another very popular phrase you might have come across is ‘don’t put all your eggs in one basket.’ Here also, the underlying principle remains the same i.e. diversification.

And it’s not that these are mere statements just for the sake of it, but diversification really does work well in the market and has been proven historically. 

How does it work? Simple statistics and common sense investing you might say. Have all such asset classes in the portfolio that are non-correlated. Say equity with gold, bond, real estate or even cryptos etc. 

The latest announcement by SEBI is no less than a cheer for investors looking to diversify their portfolio.

SEBI has recently granted permission and has given a green signal to asset management companies to launch silver related ETFs or funds. And guess what? Recently 3 of the top AMC’s of the country have come up with two ETFs as well as three fund of funds schemes on silver.

So this was all about diversification and regulatory change, but the real question to be addressed is, does it really make sense to invest in silver ETFs?

Well to answer this, have a look at this chart:

The above graph shows the comparative price movement [in % taking common base] of MCX silver futures, MCX gold futures and nifty futures.

Intentionally data post 2020 is taken in order to see and evaluate how different asset classes reacted in case of a black swan event like covid.

As expected, equities generated higher returns between the three asset classes. But did you know what the interesting observation was? Post the dip, silver recovered faster than the equities and continued to give higher returns for almost a year. It was in the later part that it settled in between the equities and gold. Although the gold prices rose initially, it remained sideways for the rest of the year.

Thus this clearly shows how silver has mixed traits of equities and gold and has the potential to generate moderate returns.

Besides returns perspective, silver also has wide industrial applications. Also Push towards renewables and electric vehicles will ultimately lead to increased demand for silver because of its application and wide usage across industry verticals. 

Although globally, the AUM of silver ETFs [$15.06 billion] is much less than gold ETFs [$206.3 billion], investors looking to diversify their portfolio and are not willing to hold silver in physical form can look for silver ETFs and funds.

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