Art Of Asset Allocation

Ankur Garg and Juhi Garg,
Directors, Diva Jyote Portfolios Pvt Ltd

The ongoing corona virus pandemic has rattled equity markets across the world and these may continue to be volatile in the near term as well. However, this is not the first time an equity market is experiencing an economic or medical crisis. It has weathered significant financial as well as economic events in the past, including terror attacks, natural calamities, global financial crises, sovereign defaults, virus epidemics, etc. But despite all such events, equity as an asset class has continued to generate relatively better returns for the investors over the long term.

Instead of fretting over the Sensex and Nifty levels, we should try to understand the valuation of these two indices. Stocks have two values – intrinsic value i.e. real value and market value i.e. the current price. For an investor the value that matters the most is the intrinsic value. If the current market value is less than the intrinsic value, then you should definitely invest. And how does a person understand this? The easiest way to gain insights is through the various valuation metrics that try to estimate the value of a stock.

The basic objective behind employing any valuation tactic is to access whether the stock that you plan to buy is cheap or expensive. In the same manner, the valuations of benchmark indices like Sensex or Nifty matters. The valuation of the stock market is a good indicator of whether you should be aggressively buying stocks or would it be wiser to go slow. When you build a portfolio for a financial goal, some assets will act as the core but moving in and out of them and at the right time is extremely important too. This is where investment solutions that rely on in-house valuation models with high accuracy can really help make profitable choices.

Asset Allocation

Asset allocation, at a concept level, may be easy to understand. However, in practice, it is quite difficult for untrained investors. Spotting trends and acting on them at the right time requires years of analytical experience, control of emotions such as euphoria, despondency, greed and solid principles based on which switches between asset classes will happen. Following each and every development related to macro and micro, both in the domestic as well international markets, is not an individual or an easy job. Plus, there is the taxation impact when one toggles between asset classes. As a result, taxes will eat into the profits made, thereby impacting the overall return. Because of all these reasons, balancing and maintaining asset allocation as per the attractiveness of asset classes is not an easy task.

Asset Allocation with Mutual Funds

In order to assess these needs, Indian mutual fund houses have launched asset allocation funds. Some of them are actively managed while others have a more static approach. The aim of these types of funds is to help investors ride the asset waves and make meaningful gains to one’s portfolio. Most of the funds in this category use proven market metrics like price-to-earnings and price-to-book to make equity asset allocation decisions.

On the other hand, there are certain fund houses which have developed their own in-house models. These models basically take into account a variety of market factors to generate an output which can provide as a lead to the investment decision. However, one has to be mindful of the track record any such model has generated over complete market cycles to understand if it is a reliable one. Thankfully, within this category, there is a model with proven track record which has done well for its investors over a complete market cycle.

The best part about asset allocation funds is that they automatically rebalance the exposure to various asset classes based on their relative attractiveness. More importantly, this buying and selling in the portfolio does not attract any short or long-term taxation. As a result, this not only enhances the client’s returns but also manages profit booking in the portfolio by realigning the portfolio as per the attractiveness of asset classes. Owing to the structure of the fund, an asset allocation fund can be considered to be a part of every client’s core portfolio.

The writers is a Directors, Diva Jyote Portfolios Pvt Ltd
Email id : ankur@divaportfolios.com
Website : www.divaportfolios.com