Asset Allocation: The Mantra Of Success

Saravanan S ( CFP) Director,
Purplepond Investments

The year 2020 has thrown up several surprises till now. The impact of all the developments in the year on overall economy and hence personal finances of many people has been severe. Take, for instance, the stock market, which has been a roller-coaster ride since January 2020. In January 2020, the benchmark BSE Sensex was at an all-time high. By mid-March, the Sensex was down by almost 40 per cent from its peak. Many investors were left stranded.

The impact was severe, especially on those who needed to liquidate their investments for financial goals scheduled during the year. This would make an investor think: what should I do differently so that I am not caught unaware like this. To be fair, there will always be an element of risk associated with investments. What, however, can be done is that the risk can be managed intelligently.

Importance of Asset Allocation

This is where the concept of asset allocation comes into the picture. The practice of asset allocation is nothing but ensuring that all of your investments are not concentrated at one place. Easy to say, but in practice, this could be a little challenging to implement. The reason is that most retail investors could find it difficult to either execute decisions on rebalancing their investments, or would hesitate in either fear or in greed.

For instance, an individual would be sceptical about reducing allocation in equity in January 2020 in anticipation of the market scaling further new highs. In fact, most investors end up buying more in such situations. On the other hand, an investor would have been quite pessimistic in March when the market was in a tailspin. In this case, many investors would have even sold off their existing investments, even with a loss, due to panic. What they should have done is quite the opposite. This is why asset allocation is easy to understand but is difficult to execute.

The reason why asset allocation is important is because not all the assets will outperform or underperform at the same time. Each asset class will react to an economic development in its own way. For example, in the month of March, when equities reacted sharply in the negative to the spread of the pandemic, gold as an asset rallied. In effect, the presence of various asset classes in a portfolio will ensure that the adverse development in a single asset class will not weigh down heavily on the portfolio. So, what if there is a system where your asset allocation is dynamically taken care of?

Enter, Asset Allocation Funds

Asset allocation schemes are generally dynamically managed schemes and are classified as a part of the hybrid schemes category of the Securities and Exchange Board of India’s mutual fund categorisation; these are open-ended mutual fund schemes. In other words, these schemes are allowed to move their assets under management from equity to debt and vice-versa as per their own strategy as and when they deem fit.

As highlighted above, these funds meet the asset allocation requirements of their investors by balancing some risks. As per established practices in the industry, these schemes would have reduced their equity exposure when the market was nearing the peak in January. On the other hand, such a scheme and their managers would have taken advantage of the low valuation in March by buying more equity. Mutual funds have devised their own strategies to gauge when the market is near a peak or when the valuation is attractive for them, and their investors.

The very nature of the asset allocation funds makes it a ‘must have’ in every retail portfolio, thereby reducing the inertia of fear as well as greed that an investor might feel at their own level. This is even more important in the ongoing situation where the economic activity is picking up and hence the market can scale new heights soon. Entrust a professional fund manager to take the decisions, and that can help you keep your investments balanced, and in a relatively lower risk zone.

The writer is a Director, Purplepond Investments
 Email id : saravanan@purplepond.in
 Website : www.purplepond.in