Asset Allocation In Turbulent Times
10/10/2011 5:11 PM Monday
CEO, Wiseinvest Advisors Pvt Ltd
If you are a serious investor and follow an asset allocation method to decide the asset mix for your portfolio, you would typically have equity, debt and gold in it. While asset allocation helps in diversifying your portfolio, each asset class requires a different investment strategy to stay on course.
What Should You Do In The Current Market Scenario?
For some time now, gold and debt funds have been yielding good returns. Equity, on the other hand, has been under performing due to a turmoil in the global economies and the consequent downturn in the stock market.
Thus, if your portfolio has a higher allocation to equity funds, you must have been through a harrowing ordeal during these turbulent times. Surely, there may have been the temptation to move money out of equity funds and invest in debt funds as well as in Gold ETFs or Gold Savings Schemes. Though the move to switch to more conservative investments options may seem like a sensible thing to do, the fact remains that selling in a down market can be a costly mistake.
Hoping that you would have resisted the temptation to do so until now, here is what you need to do ahead:
Equity Portfolio: Equity, as an asset class, requires not just a long-term commitment, but also a deep understanding, close monitoring as well as active management of the portfolio. Besides, investors must have the patience and perseverance to wait out the volatile periods. Remember, volatility is a natural phenomenon in the stock market. Over the longer term, equities not only have the potential to outperform other asset classes, but also provide a positive real rate of return.
While it is true that SIP investors have also suffered losses in the current downturn, what you must remember is that their fresh investments at the current levels will go a long way in accelerating the recovery process going forward. The ‘Rupee Cost Averaging’ will work the best for them, as the current NAVs are at considerably lower levels as compared to say, a year ago.
Therefore, the key would be to focus on the long-term objectives and continue the investment process. Remember, a disciplined approach takes away the speculative element from the investment strategy and ensures success.
Debt Portfolio: Since interest rate movements can have a significant impact on a debt portfolio, there is a need to monitor it, not only to realign it with the changing interest rate scenario, but also to protect the gains and improve over-all performance. The key is to manage credit and duration risk efficiently. Among the debt funds, the maturity duration of the portfolio is a major differentiator. Each debt fund category has a different risk profile and commensurate returns potential. The longer the maturity duration of the portfolio, the greater the impact of an interest rate change. Similarly, ultra short-term debt funds and short-term funds, which have shorter maturity durations, experience lesser impact of the interest rate movements than medium-term debt funds.
As we are towards the end of the rate hike cycle, Fixed Maturity Plans (FMPs) remain a good bet to lock in money at attractive rates. In case you do not intend to lock in money but have a time horizon of a year or so, short-term debt funds can be considered. For a time horizon of 12-18 months, income funds can also be considered, provided you can live with occasional bouts of volatility in the pursuit of higher returns. If you do not mind some exposure to equity in order to get better returns than what pure debt and debt-oriented funds offer you, Monthly Income Plans (MIPs) can be a good option for two to three-year time horizon.
Gold Portfolio: Gold has yielded great returns over the last couple of years. It is no wonder then, that many investors are facing a dilemma of what to do with their gold investments. If you have been investing systematically in gold to accumulate it for a specific purpose, such as child’s marriage or as a part of an asset allocation process, it makes sense to stay invested and continue the process of investing fresh money in it. For those who had invested for the short term with the objective of benefitting from the rise in the gold prices, it may be worthwhile to book profits on a part of the portfolio.
Find More Articles on: Personal Finance, DSIJ Magazine, In Focus, Mutual Funds