Do The Balancing Act

Do The Balancing Act

Pravin Bhalerao
Managing Partner, Pranitya Wealth LLP

When building a portfolio, an investor should always be mindful of asset allocation as it is the single most important factor in helping generate better risk-adjusted returns. While equity as an asset class tends to outperform over longer timeframes, it is unthinkable to have a portfolio consisting of only equities. For example, end of March 2020 correction, the three-year returns of several equity mutual funds were in the negative while the debt returns to 18to 24% in absolute terms. It is imperative to understand that economic and interest rate cycles have a larger bearing on how asset classes perform. Hence, based on one’s risk profile, a portfolio should consist of various asset classes – equity, debt, gold and cash.

The Right Asset Allocation
Toggling between asset classes as a part of asset allocation is easier said than done. In order to address this challenge, mutual fund houses are offering multi-asset funds or dynamically managed balanced advantage category of schemes. Through these funds, the fund manager, based on market conditions, decides on the asset allocation, thereby protecting potential downside while optimizing returns and reducing the impact cost. Based on the benefits offered, balanced advantage funds emerge as a category which is best suited for investors across risk profiles. One may also look at fixed allocation to equities, debt and commodities by investing in multi-asset funds. The beauty of these funds is that while experts manage the invest-ment, the approach is tax-efficient and the associated transac-tion cost is much lower.

Investment Style
One needs to realise and appreciate that there are various strategies such as growth, value, etc. that a fund manager can adopt when it comes to fund management. Each of these styles will have phases when they outperform or underperform. Value stocks recovered post the big Budget announcement on privatisation and divestment of many PSUs. The point to note here is that investing in equity is all about patience. Investors often think that buying cheap is value without thinking that it could also turn out to be junk. Value is not always about cheap valuation but buying names which are reasonably valued with upside potential on re-rating.

The best example of this is Tata Steel, Hindalco and Tata Motors. The recent rally in these names took several investors by surprise. The names are of well-managed companies with debt on their books due to the capital-intensive nature of their business but they are backed by solid corporate governance. Thus far these stocks were under pressure due to a depressed economic cycle but on revival of the global commodities cycle, these stocks bounced back, offering at par returns with growth stocks. Therefore, in the longer run, a blend of growth and value tend to work better than using either one inisolation.

International Investing
Global investing over the past years has been gathering pace. The interest has been largely towards the US markets. However, when investing overseas, Indian investors have to be aware of the currency risk and economic or political risk associated with this kind of investing. Any development in the political environment in the target market is bound to affect the investments made in those markets. The existing structures with foreign exposure offer could be one of the three variants: 1) 35% outside India, 65% within India, 2) 100% outside India through Fund of Fund (FOF) route, or 3) LRS, where you get to invest directly or through the fund route. Each of these options has its own merits and demerits. In our opinion, diversification come in play when portfolio reaches certain size which warrant geographical diversification.

For instance, imagine only India being affected by the pan-demic. The other distinguishing factor is that in the Indian listed universe we do not have names from several industries which are a subset of technology and pharmaceutical space, an example being FANG. Also, after a certain point, emerging markets’ growth may tend to taper and then one may need to scout for investment opportunities outside of India. Low correlation between Indian and Global markets make investing overseas beneficial. When it comes to making investments, we would prefer the FOF route which has exposure to USA and global-centric funds. This could either be index-based or actively managed.

The writer is a Managing Partner, Pranitya Wealth LLP
Email: pravin@pranityawealth.com
Website: www.pranityawealth.com

 

Rate this article:
No rating
Comments are only visible to subscribers.

DALAL STREET INVESTMENT JOURNAL - DEMOCRATIZING WEALTH CREATION

Principal Officer: Mr. Shashikant Singh,
Email: principalofficer@dsij.in
Tel: (+91)-20-66663800

Compliance Officer: Mr. Rajesh Padode
Email: complianceofficer@dsij.in
Tel: (+91)-20-66663800

Grievance Officer: Mr. Rajesh Padode
Email: service@dsij.in
Tel: (+91)-20-66663800

Corresponding SEBI regional/local office address- SEBI Bhavan BKC, Plot No.C4-A, 'G' Block, Bandra-Kurla Complex, Bandra (East), Mumbai - 400051, Maharashtra.
Tel: +91-22-26449000 / 40459000 | Fax : +91-22-26449019-22 / 40459019-22 | E-mail : sebi@sebi.gov.in | Toll Free Investor Helpline: 1800 22 7575 | SEBI SCORES | SMARTODR