Asset Allocation: The Key To Sound Sleep
Director, Imperial International Pvt. Ltd
When it comes to long-term wealth creation, it is a known fact that optimal asset allocation is a must. However, with greed and fear coming in the way of successful investing, an investor often tends to go off the charted path.One of the most important steps to build a successful portfolio is properly dividing assets among different types of investments. Because these investments perform differently depending on economic conditions, a good balance can help in developing a strong portfolio which can withstand a wide range of economic situations. Among the asset classes, equity offers the best long-term growth prospects. Fixed income investments are a safer investment with relatively lower returns while cash has a role to play when all 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. Furthermore, 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 Financial Planning diversification. As a means to address this challenge, the Indian mutual fund industry introduced a hybrid category fund known as dynamically managed asset allocation scheme.
Making the Most of Market Volatility
It is a known fact that investors, not only in India but also around the globe, tend to get unnerved by market volatility. This leads investors to take decisions in a panicky state, which often are disastrous to one’s own interest. What is often forgotten is that the ability to make disproportionate gains often stems from such volatile times. The fund manager of such a scheme will always aim to buy low and sell high. This means the fund manager will tend to increase the equity exposure of the portfolio whenever there is a market correction or at choppy times, thereby aiding the buy low part. As and when the market starts recovering and when it rallies in the ensuing days, the fund manager will sell some of the equity positions, thereby aiding the sell high part and these gains are then allocated to debt.
Moreover, within equity the fund manager will allocate between small, mid and large-cap equity. Similarly, in debt the fund manager will have his eye on government bonds, high-yield bonds and the money market. Such an approach means that while one gains from the equity market, the presence of debt ensures that the portfolio is well-cushioned to brace any bout of market volatility and limit portfolio downside. From an investor’s perspective, one need not worry about how much to allocate to which asset class, when and what quantum to rebalance, etc.
Addressing Emotional Biases
Very often emotional biases impact investment decisions. For example, investors tend to hold to historical investment positions, causing them a loss. But instead of booking loses and moving on, investors keep holding on in the hope that someday it will be a profitable trade. Conversely, if there has been a massive rally in a particular investment, investors find it very hard to take profits off the table for the fear of missing further upsides. As the market tide turns, very often most of the gains tend to be wiped out in a very short span of time, even before investors could realise and make a move. Expert fund managers take a view by constantly evaluating allocation strategies, including, but not limited to, constant weight asset allocation, tactical asset allocation, insured asset allocation, dynamic asset allocation and lifecycle fund asset allocation.
As an investor you should take advantage of the availability of such a mutual fund scheme. This will not just ensure that you have a reasonable asset allocation at all times, but as a consequence, will also result in optimal risk-adjusted returns for you. Further, such a fund can be considered as an all- seasons fund for investors.
The writer is Director, Imperial International Pvt. Ltd