Recently, stock markets have been highly volatile due to the escalating COVID-19 outbreak and plummeting oil prices.
During this time, investors can consider building a safety net by employing strategies which seek to preserve your investment capital. The focus is on trying to protect what you already have while gaining some potential returns and growth. This strategy is designed to give peace of mind as a portion of your portfolio is exposed to lower risk.
For clients who are nervous about current market conditions, you do not need to feel obliged to leave your money in high risk investments.
You can consider reducing the risk of your portfolio by divesting a portion in short-term securities like money market securities or ultra-short duration fixed income securities.
This can prevent your entire portfolio getting whipsawed by volatile markets. Another benefit of maintaining a portion of your portfolio into investments with high liquidity is to keep dry powder so you can rebalance your portfolio when the market shows signs of recovery. One of the ways for investors to do this is to increase your allocation to money market funds or ultra-short duration funds.
Similar to money market funds, ultra-short duration funds also invest in short dated fixed income securities but take some credit risk. These funds usually invest in cash equivalent securities, investment grade bonds, and high yield bonds that are of maturities from six months to 1 year. Therefore, these funds are relatively liquid and low in risk.
Let us have a look at the performance of the money market fund and ultra-short duration fund that we have on our platform compared to the indices.
Since the start of the year, indices have generated losses. However, the two funds on our platform have been resilient – in comparison to the equity indices which suffered losses in the range of -10.3% to -26.0%.