The conservative investors with low threat appetite are facing the threat of erosion in the acquiring energy of their capital invested in Fixed Deposit (FD) in banks or in equivalent fixed earnings instruments as the interest prices on such instruments lag behind the price of inflation.
Taxable Interest
Even if the interest on such instruments matches the price of inflation, it eventually fails to beat the value rise immediately after paying taxes on interests earned.
The Biggest Risk
Already facing the particular threat of capital erosion, taking no threat will be the most significant threat for the FD investors, who do not have abundant cash to withstand the devaluation.
Need of Diversification
So, to preserve the acquiring energy of their capital intact, conservative investors have no decision but to diversify.
How to Diversify
While diversifying, apart from some higher yield fixed return instruments, the investors should really also contemplate allocation of some component of capital in equity and gold.
Hedge with Gold
As gold acts as a hedge through the falling economy and market place cycle with greater return, it will aid in lowering the volatility. That is in case of market place fall, the increasing gold rates would do a balancing act and vice versa.
Mutual Fund
Even in case of investments in fixed earnings and equity, rather of placing cash in single bond or stock, additional diversification may possibly be carried out by investing in mutual fund (MF) schemes, i.e. Debt Funds and Equity Funds respectively.
Mutual Fund Investment: Should you do asset allocation oneself or opt for hybrid funds?
ETF
To get a return equivalent to the return of the underlying benchmark index, an Exchange Traded Fund (ETF) – that replicates the composition of the index in its portfolio – may possibly also be deemed.
Balanced Funds
In case an investor finds it challenging to invest in Debt Funds and Equity Funds separately, he/she may possibly opt for a Balanced Fund.
Gold ETF
Similarly, rather of investing in physical gold, investors may possibly opt for Gold Funds or Gold ETF for security and liquidity.
Multi-Asset Funds
For comfort in investments, investors may possibly opt for Multi-Asset Funds, that, apart from investing in debt instruments, equities and gold would also place some cash in international stocks for geographical diversification.
Investors’ Choice
So, investors may possibly either opt for to do asset allocations themselves or may possibly opt for tailor created funds, but they have to diversify and can not basically stick to FDs to remain ahead of inflation.