30 October 2024
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Asset Allocation is the key for a successful investment experience. It involves an investment strategy of diversifying your portfolio across various asset classes. This primarily works on the principle of risk mitigation by not concentrating your portfolio only in one asset class. As a result, this approach tends to offer better risk-adjusted returns on your investments taking care of the unnecessary concentration which could be asset-centric or region specific. Since all asset classes - equity, debt and commodities — have distinct market cycles, often not in sync, it is always prudent to allocate your investments suitably across assets to optimally gain over the long term.
Typically, when it comes to asset allocation, majority of investors tend to confine themselves only to two domestic asset classes — equity and debt. This way, though their portfolios look diversified, they end up ignoring the fact that their investment is highly concentrated on the growth story of only one country - India. What they miss out is that there is much more than just domestic equity and debt when it comes to asset allocation.
Global Diversification
There is no doubt that India is a great growth story which will keep unfolding at least for next two more decades. However, it is equally true that the global financial market is much bigger than India’s and so could be the available investment opportunities across the world. Therefore, it may be useful and a strategic move if one also looks beyond Indian markets into international equities and commodities while following the allocation strategy.
Several market trends in the past suggest that equity markets of all countries do not perform in tandem. Some gain, some lose while others consolidate or remain volatile during the same time period. There have been times when Indian markets did not perform while the US and European markets outperformed, and vice-versa. Therefore, allocation to international equities along with domestic equities can prove beneficial for investors in the long-run.
For instance, the developed markets like the US and the European markets or for that matter the Asia-Pacific markets involving economies like Japan and China along with several emerging markets like Korea, Malaysia and Indonesia also offer various investment opportunities. While at it, remember that different economies have their fair share of challenges and opportunities and growth rate will differ.
Diversifying with Commodities
Similarly, when it comes to commodities, gold is oldest known commodity from an individual’s asset allocation perspective. But now we have the option of investing in silver as well. Investors can use the ETF or the FoF route for silver exposure. Given the factors which influence gold and silver prices differ in nature, silver can be a worthy diversifier to a portfolio.
Investment Avenues
For a lay investor investing into international equities is no easy task. Picking foreign stocks needs a lot of research, time and effort; it may not be possible for the majority of investors to do it on their own. Hence, it is advisable that one should take exposure to global equities through a mutual fund scheme. Here, a professional fund manager here will make the necessary allocation and tweak the portfolio as and when required. Here, investors have a variety of choices such as country or region-specific funds, thematic international funds and global funds with fund of fund structure which facilitate international investing for domestic investors in a stress-free manner. In this manner, investors are able to capitalise on the investment opportunities across the globe and meaningfully diversify the portfolio and add significant value in terms of returns.
Today, there are mutual fund product offerings wherein allocation of domestic and international equities, debt, commodities are all available within a single fund. By investing in such a fund an investor need not worry about allocating to different asset class or rebalancing the portfolio as all of these will be taken care by the fund manager. In effect, not only will your portfolio be truly international, but also your wealth creation will be much smoother and balanced going forward.
Disclaimer
The views are personal and are not part of the Outlook Money editorial Feature.
P B Dhilip, Founder , DhiFin Capital
