There is a famous saying in Hindi that goes like this: paanchon ungli ghee mein, sar kadai mein. This translates to ‘five fingers in ghee, and head in the cooking vessel’. The proverb is meant to indicate an extremely good fortune due to multiple sources of income/growth. With proper asset allocation for your investments, one can indeed enjoy the same benefits.
By apportioning a portfolio's assets, asset allocation minimizes overall volatility while optimizing return potential. No single asset can perform all the time. This is why there is a need to spread your investment rupees across several asset categories. In the current market scenario, asset allocation deserves attention from long-term investors who are here to create wealth without exposing themselves to excessive risks.
Contemplating which asset to pick is a wrong start
A. Vinodkumar, Senior Financial Advisor, Perpetual Investments
Every new investor entering the financial markets starts with the same problem of what to buy. This question essentially assumes, and wrongly as well, that there is a one-size-fits-all solution in the form of a single asset.
In reality, every asset category/class has its own weaknesses and strengths. Our financial savings will not respond to the same market forces in the same way at the same time. This is why, with proper asset allocation, the effect of your investments in one category performing poorly will be offset by assets in another category that are performing well. Thus, losses in one are minimized when you look at the overall effect on your portfolio.
Instead of going 100% equity or 100% debt, it is important to stick to the golden rules of asset allocation. So, the right question is 'what assets', not 'which asset'. Asset allocation has to be done according to the individual's goals, risk tolerance and investment horizon (how long you plan to keep your money invested). Hence, it is an extremely personal solution, because every individual is unique.
The most important decision
Equity markets today have entered a new phase, after months-long volatility. Fixed income/debt markets are slowly calming after a liquidity-crisis triggered in NBFCs. On the other hand, gold has, after many years, has given its supporters something to be happy about. Cash remains king, as always. In this market scenario, investors will have to resist the tendency to be pulled in one direction. To avoid mistakes, determining appropriate asset allocation is the most important single investment decision you will make.
Asset allocation, studies show, is 90 per cent responsible for investment portfolio returns. While many investors spend a majority of the time in selecting individual investments, actually a substantial period of time should be spent in deciding the asset allocation. The nature and quantum of exposure to various assets will impact your overall return than the selection of individual investments.
Don't hesitate to get expert help if you need it for asset allocation. Today, mutual funds offer portfolios with in-built asset allocation models that do the job of an expert in allocating investments as well as monitoring them. With dynamic asset allocation funds, an investor no longer needs to periodically review portfolio to ensure that asset allocation is progressing as per plan. With dynamic asset allocation funds, your chosen mix of investments in a dynamic manner will continue to serve your investment needs as circumstances change over time.
SIP the sip
Once your asset allocation decision and investments are decided, the last and final leg of the process is deciding how to invest. Should you take it one investment at a time—that is, in lump sum form—or should you opt for regular investments in a disciplined way? The latter is a better option. You earn every month, you have to spend every month, and so you should invest every period regularly. To suit your financial life, the systematic investment plan or SIP is the best approach.
SIP allows you to invest a fixed sum of month in a disciplined manner to fund your financial goals. With as low as Rs 500 per month option, SIP allows almost everybody to invest for their dreams. Once your asset allocation system is in place, simply choose the SIP route to automatically invest each month via a one-time bank mandate that transfers the money from your bank account to a MF account without the need of writing a cheque every time.
Combining asset allocation and SIP, new retail investors have a powerful way to manage their financial goals with regular and automatic investments. This is best suited for long-term investors who are saving and investing for key life needs.
The author is Senior Financial Advisor, Perpetual Investments.
The opinions expressed in this article are those of the author's and do not purport to reflect the opinions or views of THE WEEK.
