How portfolio diversification helps to handle volatile mkt

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Below is the edited transcript of Harshvardhan Roongta's interview with CNBC-TV18

Q: Considering the amount of volatility that we have seen even specially offlate what would you recommend to small investors? Nibble at equities or explore other asset classes.

A: Every investor needs to keep in mind that equity markets are volatile and will always remain volatile. Secondly, like there is no substitute to hard work, within a portfolio there is no substitute to diversification. So, moving completely out of one asset class because it is volatile or investing into an asset class only because it is volatile and gives you potentially high return over the long term may not be a wise thing to do.

What an investor needs to do is diversify and balance his investments into different asset classes. There is a risk associated with every asset class, for instance a bank fixed deposit confers upon saying that okay the capital remains safe but there is an inflation risk. While in equities there is some risk on the capital, but it takes care of inflation.

Suppose an investor has to invest Rs 1 lakh for a period of five years. So, he puts Rs 70,000 into debt and Rs 30,000 in to equities. Let us see what happens after five years. Scenario one, a debt investment current situation you will get a 9 percent return, Rs 70,000 becomes Rs 107703. The Rs 30,000 scenario, the markets have done very well, he has got 15 percent return on the equity component so Rs 30,000 becomes Rs 60,340. So total return on the portfolio is about 10.93 percent, almost 11 percent which beats inflation.

Scenario two the equity markets have not done anything, they have remained flat which has been the case in the last five years and Rs 30,000 invested has remained Rs 30000. In that situation, investor will get 6.6 percent returns on his total investments, 9 percent from debt and no returns from equities.

In third scenario the equity markets have betrayed him, the Rs 30000 investment has become half to Rs 15000. In that situation also he gets his return, he has invested Rs 1 lakh, he gets Rs 122703. So the returns on the total portfolio, the yield works at about 4.17 percent. The idea is when he is taking a calculated risk and balancing his portfolio in such a format, he ensures one thing that his capital is protected. Secondly, he is attempting to beat inflation. There is a notional loss of the returns he could have gained in the worst case scenario. However, capital is protected.

So whenever you are making an investment, the idea is unless you take that kind of calculated risk, you will never be able inflation. Secondly if your objective is to protect capital, you can divide it with 30 and 70 ratio so that at least after five years if capital is protected and you get nominal returns which is savings bank returns at least on your portfolio. There has to be a balance in your portfolio, volatility should not lure you into equities, nor drive you away from equities.