Making The Right Asset Allocation

Jaydeep Doshi
Director, Proinvest Wealth Managers Pvt. Ltd

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk-taking ability, and investment horizon. The primary objective is to reduce risk and create diversification by dividing assets among major asset classes like such as equity, fixed income and gold. Choosing an asset allocation is one of the most important decisions that investors make; once investors find the correct asset allocation mix and plan their investments, it becomes that much easier to handle market volatility.

The spread of the pandemic has led to several uncertainties, especially in terms of the effects from an economic point of view. As a result, volatility is expected to prevail in the near to medium term, not only in India, but also globally. For an investor who is taking exposure to equities, one of the fundamental principles to happy investing is the realisation that volatility is an inherent part in equity markets. So, instead of fearing market volatility, it is better to embrace it and use it as an opportunity to accumulate units at a lower cost. This will help improve the return profile over the long term. Mutual Funds offer a wide range of innovative products. Investors can consider Asset Allocation funds in order to optimize the risk adjusted returns. These funds periodically align their portfolios between Equity and Debt based on various fundamental parameters like P/E, P/B etc. Mutual Fund typically offer two types of Asset Allocation Funds.

1. Dynamic Asset Allocation Funds: These funds are actively managed where the fund manager adjusts the asset allocation based on trends, either in the economy or the stock market. 

When markets turn expensive, fund managers reduce their exposure to equities and increase their exposure to debt and arbitrage. On the other hand, when market valuations improve, they increase their exposure to equities and reduce their debt exposure. In actively managed schemes the outperformance of the fund is highly dependent on the fund manager’s decision to move from one asset class to another, as and when the opportunities arise.

2. Static Allocation Funds: These funds are allocated to different asset classes based on a pre-determined percentage. The changing market conditions would not lead to any change in percentage allocation. Some of the balanced funds can be considered as examples of static asset allocation funds.

Adhering to Asset Allocation

Asset allocation as a strategy may seem simple, but when it comes to the implementation part, an investor has to deal with a variety of aspects such as taxation impact, periodic review, rebalancing when required, etc. It is observed that due to the busy work schedule of an investor, he or she cannot devote the desired time and effort to realign the portfolio consistently. However, if an investor opts for asset allocation funds, the task becomes relatively simpler. The fund manager who is an expert on the subject matter will be closely tracking the market and reviewing the portfolio on an ongoing basis with an aim to capture the myriad opportunities present across the asset classes. Further, an investor will be relatively free from the tax hassles of each and every transition. 

Given the dynamic asset allocation strategy followed, these funds can be considered as all-season funds for investors. Every instance of market volatility gives the fund an opportunity to invest in various asset classes. As a result, such funds over a complete market cycle help in generating better risk-adjusted returns for the investors. Investors who are looking for lump sum investments too can surely consider this fund.

The other beneficial aspect of such funds is that they help to reign in greed and fear which are behavioural aspects of investing. There could be times when the equity market is performing better than other asset classes and hence; investors may be tempted to move some of their debt allocation to equities in a bid to capture the gains seen in the market. This distorts the allocation and does more harm than good in the long term. However, by the time we realise this, the damage would have already been done. By investing in an Asset Allocation Fund, one is immune to such temptations and is insulated from making costly investing errors.

To conclude, asset allocation funds have an important role to play in an investor’s portfolio. Since, they are dynamically managed, this is one category where investors can always consider lump sum investment, and make the most of the market opportunities across equity and debt asset classes. 

The writer is a Director, Proinvest Wealth Managers Pvt. Ltd  
Email id : jd@proinvestwealth.com  
Website : www.proinvestwealth.com