The Art of Asset Allocation

Someswara Rao Polamarasetty
Mutual Fund Distributor

When making investment decisions, most individuals focus on growing their capital. Only when they see a large market fall do they come to terms with the risk involved. For most investors, timing the market is very difficult. Markets also tempt you to do the opposite of what one should ideally be doing. At market highs, the news flows will be very positive. One also gets comfort from past returns being good. So, one ends up buying more when the market is high. On the other hand, the time when the buying opportunity is best will also be the time when news flow will be extremely negative and one will not feel like buying.

Due to this behavioural limitation not too many have gained from market growth. For example, in a little over 40 years since its inception, the Sensex has moved up a staggering 430 times! Does the portfolio of an investor reflect such gains? The answer most likely is a ‘No’. The other aspect is managing risk prudently when dealing with riskier asset classes such as equities. This leads to a question: how can a risk-averse investor take advantage of the growth potential of equities? The best way of doing this is to practice asset allocation.

What is Asset Allocation?
Asset allocation is the process of deciding how to divide your investment across several asset categories. The asset categories here can be equity, debt, gold, etc. The goal of asset allocation is to minimise volatility in one’s portfolio while maximising return. The process here involves dividing your investment among various asset categories that do not all respond to the same market forces in the same way at the same time. Stocks or equities do well under vastly different conditions compared to fixed income or debt investments. The equity market tends to generally perform well in expansionary economies.

On the other hand, bonds tend to generally perform well in contracting economies. Given that the economic conditions are not static in nature, the attractiveness of an asset class will tend to vary from time to time. As a result, if your investments are concentrated in a particular asset class which may not be performing very well at a particular point in time, the entire portfolio is bound to be impacted. Having a diversified portfolio with holdings across asset classes ensures that the gains in a particular asset class will help offset some of the losses in another asset class, thereby helping to reduce the negative impact of the laggard asset class on the overall portfolio.

Asset Allocation Schemes
As a lay investor, if all these tend to overwhelm you, then it is best to consider asset allocation schemes offered by several mutual fund houses today. The aim here is to invest your corpus across equity and debt depending on how attractive each of these asset classes is. What the fund manager here does is that when the equity markets are cheap, the allocation to equities is increased and as the market starts to rally and the market valuation rises, such funds sell equities incrementally and shift to debt asset class. Such an arrangement ensures that the capital invested tends to be protected from the ferocity of extreme market movements.

The presence of debt further ensures that the downside of the portfolio is protected at all times. Such an arrangement frees the investor from tracking the equity and debt market, the need for rebalancing from time-to-time, and more importantly keeping a track of taxation incurred owing to such rebalancing. In effect, by investing in an asset allocation fund, all of the above mentioned requirements are taken care of. So, this becomes a one-stop solution for an overwhelmed investor.

Take Away
Since determining an appropriate asset allocation is the single most important investment decision because of its high impact nature, it is important to get this right. Seek the help of a financial planner who can help you reach optimal asset allocation as per your financial goals. Also, be sure to periodically review your portfolio with the financial planner to ensure that your chosen mix of investments continues to serve your evolving investment needs as your circumstances change over time.

For more details contact :
Email: psomesh@gmail.com