For investors, is not just about spreading money across investments. What matters is whether those investments actually behave differently when markets move.
If all the assets in a fall together during a market downturn, owning more of them may not provide much diversification.
A recent study by WhiteOak Capital Mutual Fund shows that Indian equity, gold, debt, and US equity have varying degrees of correlation. The data offers a useful way for investors to understand why different classes can play different roles in a portfolio.
What is correlation and why does it matter?
Correlation shows how two assets have historically moved in relation to each other. It ranges from +1 to -1. A positive correlation means they generally move in the same direction, while a negative correlation means they tend to move in opposite directions. A number close to zero means their movements have little relationship.
For example, if two assets have a negative correlation, a fall in one does not mean the other will definitely rise. It simply means they have historically tended to behave differently.
What does the correlation data show?
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Indian equity and US equity have the highest correlation at 0.37. So, when Indian stocks fall during a broad equity sell-off, US stocks may also tend to move in the same direction.
Indian equity and gold have the lowest correlation at -0.43. This indicates they have historically tended to move in opposite directions. So, if Indian equity declines, gold may behave differently rather than necessarily falling alongside it.
Gold and US equity have almost no correlation at 0.01. In simple terms, a fall in US stocks does not provide much indication of what gold will do. Their movements have historically been largely independent.
Gold and debt have a correlation of 0.1, while Indian equity and debt stand at -0.06. Debt and US equity have a correlation of -0.14, indicating a mild tendency to move differently.
Why does this matter when building a portfolio?
For an investor with a portfolio only in Indian equity, adding gold and debt can introduce assets that have historically behaved differently from equities.
Similarly, an investor already holding gold may consider adding Indian equity or debt to bring different return drivers to the portfolio.
For an investor with a debt-focused portfolio, adding Indian or US equity could provide greater diversification, as both have historically shown negative correlation with debt.
The idea is not that one asset will always protect against a fall in another, but that combining assets with lower correlation can help avoid putting the entire portfolio at risk.
Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.