It Is Time To Relook At Asset Allocation

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors

The unprecedented victory for the BJP-led NDA has breathed new life into the stock market. The benchmark indices hit an all-time high as Sensex touched 40,000 and Nifty crossed 12,000 for the first time on the counting day.

The political stability as well as the expectations of continuity in reforms and development agenda augurs well for the stock market. Besides, the strong domestic and FII inflows are likely to drive the markets even higher from the current levels. Clearly, the current situation has created a favourable scenario for investment in equities. However, it will be crucial to see how Modi 2.0 regime would handle the challenges and ensure higher economic growth.

Although, it is never a great idea to follow an event-based investment strategy for short-term gains, the present scenario warrants investors to revisit their long-term investment mix. It is time for them to review their current asset allocation and rebalance the same to make it growth-oriented. An exercise of portfolio rebalancing allows an investor to increase allocation to equities in the right manner and in the right proportion.

It must be remembered that the key criteria for deciding overall exposure to equities are one’s time horizon and risk profile. Any abrupt decision to invest in equities to take advantage of the momentum in the stock market as well as realigning the existing equity portfolio to make it more aggressive can backfire. Another important decision to be made by both existing as well as new investors is whether to invest directly in stocks or take the mutual fund route.

Although investing in stocks can be potentially better, one must have the wherewithal required to select the right stocks, monitor their progress and follow different investment styles such as value and growth. It can be quite overwhelming for investors to do all this on their own. Therefore, investing in equity funds would be an ideal first step option for most investors.

Mutual funds are managed by full-time professional fund managers and considering that there are a variety of funds to choose from, one can build a portfolio as per one’s risk profile and time horizon. Most fund houses follow a process-driven fund management style, rather than relying on the expertise of individual fund managers alone. This not only ensures consistency in fund management style, but also allow funds to benefit from the collective expertise of the fund management team.

Another advantage of a process-driven fund management style is that if a fund manager leaves, it becomes easier for the fund house to replace him/her with another one, who can operate within the defined guidelines. This continuity can be quite comforting to investors. On the other hand, if a fund manager is allowed to have his individualistic fund management style, the fund’s performance can suffer significantly if he decides to leave, as the fund house may find it difficult to get another fund manager who thinks exactly like him.

Mutual funds also allow investors to opt for a Systematic Investment Plan (SIP) and maintain the discipline of investing at a pre-determined interval. This goes a long way in allowing them to benefit from “averaging”.

However, to benefit from the true potential of mutual funds, one must select the funds well. Some of the key factors in this process are investment objective as well as investment philosophy of the fund, its investment universe, the level of consistency as well as diversification in terms of sectoral and segment-wise exposure. If one finds it difficult to do so, it would be prudent to take the help of a professional advisor.