Diversify across asset classes
Most market experts expect volatility to continue in the equity markets over the next few quarters. The current bout of volatility is being caused by the Russia-Ukraine war. In the future, as the US Federal Reserve withdraws liquidity from the market and hikes interest rates, its actions could have a negative impact on equity market valuations. Equities tend to be valued lower when interest rates are higher (unless the economy is in robust shape).
To cope with such a scenario, it is important to have a portfolio that is diversified across asset classes. Broadly, if your risk appetite permits, you could follow the “100 less age” formula. A 30-year-old could have a 70 per cent allocation to equities, while a 40-year-old could have a 60 per cent allocation. If you are young but have a lower risk appetite, you should have a lower allocation to equities. A 30-year-old, for instance, may opt for a 50 per cent allocation to equities. Besides equities, you should also have a 10-15 percent allocation to gold. Gold tends to do well when equities underperform. The remaining allocation can go to debt funds and other fixed-income products.
Diversify across sub-asset classes
Once you have decided on your allocation to equities, you need to build proper diversification across sub-asset classes. Over the past year, mid-cap and small-cap funds have outperformed large-cap funds. As a result, you may have become overweight on these funds.
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