Investors should play the balancing game

By - ARVIND BANSAL
VP & Head-Multi Manager Investments
ING Investment Management

In the current market scenario retail investors should follow an asset allocation approach. Choose asset classes and mutual fund schemes care-fully and re-balance the portfolio on a regular basis. India is fairly priced and well-integrated with the global markets. A single asset class portfolio would not offer superior risk adjusted returns to investors. So, an investor should have exposure to equities, debt, gold and commodities with strict financial planning. Financial planning simply means ‘planning finances to meet your future needs’.  The most popular and followed approach is ‘Goal-Based Financial Planning’. This simply means identifying a future need like buying a house, planning a vacation, children’s education, retirement, etc.

Measure the time needed to fulfill the need. And the last is the ability to take risk around the goal(s). In layman terms, it means how much of loss can an individual bear for the investment and still meet his/her needs. Once the goal or need is identified, the time period is calculated and the risk is identified, an appropriate investment portfolio needs to be constructed for the amount saved for that goal. A few basic things that an individual could look for while selecting securities are diversification, liquidity, expenses, taxation and authentic sources of data.

For every need the portfolio constructed should be diversified. This probably remains the most important aspect while investing and has been proven to be the right way of investing for ages. Diversification can be achieved through holding different asset classes. Liquidity is an important aspect one should consider while investing.  A few pitfalls of not considering this include not being able to exit while the market could go for a serious fall (e.g. fall of equities in 2008), a few senior investment professionals leaving the firm which could have an impact on the performance (e.g. partners in private equity or real estate firm leaving), portfolio where invested was illiquid and the invested paper is not saleable (e.g. FMPs holding real estate paper in 2008), etc.

For a retail investor, mutual funds are good options for investing in equities, fixed income, and gold. One could go one step further by investing through multi-asset multi-manager fund of funds wherein asset re-balancing and fund selection is done by a fund manager on behalf of the investor at a negligible extra cost. Once an investor has constructed the portfolio, s/he should re-balance the portfolio on a regular basis. In this case investors should be careful about too frequent re-balancing as it could entail higher transaction expenses and the realisation of capital gains tax. Investors should look for vehicles - such as multi-asset fund of fund in case of mutual funds - to minimise such expenses.

It is very difficult to predict what is going to happen in a few days. Over a medium term, increase in core inflation, rising interest rates and increase in commodity prices would have an overhang on the markets. However, valuations are not expensive. Therefore, any reduction in any of the concerns should result in the market moving up. Going forward, I think domestic consumption and exports will continue to be the lead areas. However, at some point of time, infrastructure and the capital goods sector, due to low valuations, could start getting favoured. For that to happen, interest rates need to come down. Government policies in the near future and reduction in core inflation will be the right triggers for the market.