Asset allocation simply means spreading one’s investments across varied assets in order to minimise the risk, which might come in many forms.
In a recent panel discussion, K S Rao, head, investor education and distribution development at Aditya Birla Sun Life Mutual Fund, and Amit Trivedi, financial author and blogger, discussed how investors can get the most out of their asset allocation plan and in which situations this strategy comes handy. The discussion was moderated by Nidhi Sinha, editor, Outlook Money.
During the discussion, Rao said that proper asset allocation can provide an edge to investors’ returns, since it balances out the risks and rewards. This is because each of the asset classes will behave very differently and it’s very difficult to predict their movement. “If one is fixated about investing in a particular asset class, they should remember that predicting the performance of any asset class is nearly impossible. Say, in January 2022, nobody knew which asset class will create wealth during the year. Analysing 2022 now when it is almost over is easier than predicting how 2023 will be,” he said.
Moreover, each asset class has a different purpose. For example,
Equity is suitable for long-term wealth creation, while debt can provide stability, and gold can hedge the portfolio against inflation, he added.
“No asset class is superior or inferior in a given time frame, but if one has limited investments and wants to get the benefit of all the asset classes and an insulation against volatility, then proper asset allocation can help,” Rao further added.
But how do you choose the instruments to ensure proper asset allocation? “A majority of common investors do not have the time or resources to study, research about all the assets and then take the investment call,” said Trivedi.
For these investors, the ideal investment vehicle is a managed portfolio where full-time dedicated fund managers manage their assets in a pool and allocate funds according to its mandate.
Trivedi highlighted that while investing in fixed-income instruments like small savings schemes, people should consider the liquidity as per their needs and invest accordingly. “If you are comfortable with the low liquidity nature of these debt instruments, then you may go for it,” Trivedi added.
Mutual funds can come handy on the liquidity aspect. “For example, if one is looking at a two-year time frame, then for him, a medium-duration debt fund is suitable. One can also buy a balanced advantage fund or manually buy some equity and majorly debt funds for short-duration liquidity needs,” said Rao.
However, for those who do not have a specific liquidity need in the short run and are okay with a long investment tenure, Rao suggested that equity would be the most suitable vehicle. “Within equity there are many options available. For example, if one’s long term goal is a retirement plan, then one may take up a balanced advantage fund, or if one’s goal is a child’s foreign education, then international fund options can be considered,” he said.
How does asset allocation help in turbulent times? Trivedi said that it has been seen historically that not all assets fall in value at the same time, so if one properly diversifies their investments, then they can be better prepared for volatility. “Over a long term, one can expect a particular asset’s price to appreciate, but this is not a linear upward journey. For example, in 2020, the equity markets crashed by 40 per cent in a couple of months but then managed to recoup all its losses. So, this is the nature of equities historically, in the short term the prices go up and down but in the long term, they appreciate. And here’s where proper asset allocation can help,” said Trivedi.
Last but not the least, the panellists concurred that if it becomes difficult to manage asset allocation on your own, it makes sense to consult a financial advisor.
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