Decoded: Gold to MFs, impact of Middle East conflict on your investments

Crude oil and India’s reliance on Middle East imports

An extended conflict could severely impact crude oil supplies from the Middle East, which accounts for roughly 45% of India’s oil imports. Analysts believe any disruption could cause crude prices to surge.

“If this conflict escalates, oil prices may rise sharply. Currently, Brent crude is trading around $94 per barrel. A spike in prices could lead to increased fuel costs in India, affecting sectors like transportation and manufacturing. This may put downward pressure on equity mutual funds, especially those with heavy exposure to these sectors,” noted Mayank Prakash, Regional Director, North India at Epsilon Money Group.

Gold’s safe-haven appeal on the rise

Geopolitical tensions often drive investors to gold, a traditional safe-haven asset. In India, Sovereign Gold Bonds (SGBs) are gaining traction as gold prices edge closer to all-time highs, currently trading at approximately $2,050 per ounce.

“Gold prices are likely to go up as central banks around the world increase their reserves. Lower interest rates in the US are making gold more attractive compared to fixed-income assets. SGBs, with tax exemptions on capital gains at maturity and a 2.5% annual interest payout, offer a secure and tax-efficient investment route for Indian investors,” Shenoy explained.

Shenoy also mentioned that demand for SGBs could see an uptick in the secondary market as well, as investors prefer SGBs over physical gold. Prakash added, “SGBs not only provide a safe alternative to physical gold but also remove the worries about storage and purity. The government’s backing and the fixed interest rate add to their appeal.”

Can cryptocurrencies offer a hedge?

Experts say the Israel-Iran crisis is unlikely to directly affect cryptocurrency values, as these digital assets are relatively insulated from geopolitical risks.

“Cryptos are still in the early stages, and they don’t have a defined underlying asset. However, we did see a 6.5% correction in Bitcoin prices to around $27,500 after the recent escalation. This suggests investors may not view cryptocurrencies as a hedge against instability,” Prakash said.

Market-linked pension schemes in volatile times

Long-term investment vehicles like the National Pension System (NPS) or Unit Linked Insurance Plans (ULIPs) could experience temporary volatility but are generally shielded from short-term geopolitical disruptions.

“Market-linked pension schemes have exposure to multiple asset classes such as equities, debt, and government securities. While the equity component might see some fluctuations, debt provides stability,” Shenoy said. He noted that pension schemes tied to government bonds or fixed-income securities will likely remain unaffected.

Strategies for protecting your investments

In times of geopolitical uncertainty, diversifying your investments across asset classes is essential. Experts recommend a balanced portfolio of equities, debt, and gold. “Diversification is the key to reducing portfolio risk. Avoid panic selling, as it often results in locking in losses,” Shenoy advised.

Key strategies for investors include:

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  Reviewing asset allocation to ensure alignment with financial goals.
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  Keeping an emergency fund in liquid assets like short-term debt funds.
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  Avoiding drastic changes to long-term investments.

Prakash noted, “For those with a diversified portfolio, gold can act as a stabiliser. A well-balanced mix of assets can help minimise losses during times of market stress.

Crafting a tailored diversification strategy

The right diversification strategy will vary depending on each investor’s risk tolerance, investment horizon, and goals. “For instance, a client might hold 60% in equity and 40% in debt, while another might have 40% equity, 30% debt, and 30% in gold. Both can have similar risk preferences but choose different asset mixes,” Prakash said.

Shenoy added, “It’s important to not overload on equities in uncertain times. Maintaining a portion of high-quality debt ensures stability. Strategic Asset Allocation should remain unchanged during crises as it’s a long-term plan. Altering it in response to short-term events could be detrimental.”

Prakash advised, “The old adage ‘don’t put all your eggs in one basket’ applies here. An ideal diversification strategy includes gold, which can act as a hedge against uncertainty. A portfolio with too much equity may not be able to weather sudden market drops. The aim should be to hold a balance of assets that can withstand shocks and continue to deliver returns over the long term.”

First Published: Oct 04 2024 | 4:07 PM IST