Asset Allocation For A Smooth Investment Voyage
N Vijayakumar Founder of Wealthy Worthy Creators
The one thing that the corona virus pandemic has done is to change the global dynamics. With equity markets across the globe undergoing a sharp correction due to the negative impact of the pandemic on global economies, retail investors are having a tough time with accumulating losses in their portfolios. At such times it is important to be prudent with your investment decisions. It is important not to let fear or greed dictate your decision-making in such volatile times. One of the most important steps to build a successful portfolio is to properly divide assets among different types of investments.
Since these investments perform differently depending on economic conditions, a good balance can help in developing a strong portfolio to withstand a wide range of economic situations. In fact, proper asset allocation allows optimal exposure to different assets individually, while on a combined effect basis it helps reduce risk and aids in protecting returns better. Among the asset classes, equity offers the best long-term growth prospects. Historically, equity has outperformed traditional fixed income investments, but suffers from an associated high degree of unpredictability.
Fixed income investments make for safer investments with relatively lower returns while cash has an important role to play when all the other assets are performing poorly. Combining these different assets ensures that the portfolio created will complement the strengths of these asset classes while fixing the probable weaknesses as well. For example, as equity markets turn volatile, the debt element in your portfolio will provide steady returns, thereby helping in downside protection. In effect, each asset class has a role to play in one’s portfolio. Therefore, do not get swayed by short-term outperformance of any one asset class.
Importance of Debt and Gold : Further, one should consider debt and gold as a part of asset allocation as debt funds are the best option for an investor with a low risk appetite and the yellow metal is one of the best hedging asset classes and provides ample liquidity in adverse situations like periods of economic crisis to bring stability in a portfolio for diversification. There have been instances where gold has delivered 40 per cent returns in a one-year period, but such performances are once in a long while. However, if one is accumulating gold for a long-term objective like a child’s marriage, then it is better to be invested in equities, as the returns generated in this asset class will help address one’s future needs.
So, as a part of asset allocation, debt and gold should play strong roles in the portfolio. A classic example is that of last year’s performance when equity delivered steep negative returns and somebody with proper asset allocation is still sitting with 6% positive returns thanks to asset allocation. It is also imperative to rebalance the assets along with asset association to get better risk-adjusted returns. Consider the following example: An investment of Rs 10 lakhs equally across gold, equity and debt would have yielded the following results for the period April 1, 2019 to March 31, 2020.
Asset Allocation Funds : Maintaining an optimal asset allocation strategy also calls for a periodic rebalancing of the portfolio to enable periodical profit booking. There may be times when one asset class may have outperformed other asset classes significantly, changing the original asset allocation mix. In order to address these needs, Indian mutual fund houses have launched asset allocation funds. These funds offer different allocation of stocks, bonds and other investments to suit different investing profiles. Here, the allocation between asset classes could be static or dynamic in nature. As an investor one has to be mindful of this fact when making investment choices. Given that market and the opportunities available are dynamic in nature, opting for dynamic asset allocation schemes is best suited when making long-term investment decisions.
Good Investment Experience : Over a complete market cycle of (bull, bear and sideways market), dynamic asset allocation funds have proved to be a relatively better investment option for all type of investors. Such funds help eliminate two major human psychologies of greed and fear. By constantly rebalancing to reflect the changing realities of equity and debt asset classes, such an investment product helps ensure a smoother investment journey. Also, one gets to follow the ‘buy low, sell high’ principle which is often otherwise not possible due to emotional biases making way into investment decisions. To sum up, it is important to get your asset allocation right and dynamic asset allocation funds are best suited to help you achieve this task. As a result, one can consider such funds for lump sum investments.
The writers is a Founder of Wealthy Worthy Creators Email id : email@example.com Website : www.vbuildwealth.com