Creating wealth is a long-term process. They say investing is a marathon, not a sprint. And rightly so, the longer you stay invested, the less impact short-term cuts / corrections have on your portfolio. While the power of compounding becomes powerful when you invest over a longer period of time, events such as market corrections and black swan events put a dent in your corpus at least for the short term.
Historical data indicates that, during the period of deep cuts, the value of the portfolio can drop as much as 60-70% (Source: NSE) from its immediately preceding maximum value. Thus, there is a need for a strategy that can help investors navigate the cuts and market crash without significantly impacting their corpus.
Asset allocation is one such strategy that has stood the test of time protecting the body of investors and has led to long-term wealth creation. Asset allocation is an investment style in which investors diversify by investing in different uncorrelated asset classes, so that any sharp correction in an asset class does not have a cascading impact. on the other. In this style of investment, the investor wants to be opportunistic and moves from one asset to another depending on his outlook on the different asset classes.
There are many forms of asset allocation combinations currently available with asset classes based on investor risk appetite, such as stocks, debt, gold, commodities, currencies. , real estate, real estate investment trusts (REITS), infrastructure investment trusts (InvIT), etc. One of the main ones is investing in stocks, debt and gold where investing in stocks is aimed at capital appreciation, investing in debt for the protection of capital and gold as a safe haven. . Another combination is Equity, Debt and Arbitrage Fund. Today, mutual funds offer various asset allocation programs across different combinations of asset classes. The multiple asset allocation fund has proven to be beneficial over a longer period.
Embracing asset allocation, however, is easier said than done. It is about having unparalleled knowledge and understanding of different asset classes. For example, which asset class to choose, what should be the asset allocation, when to enter which asset class and when to exit which asset class. Investors with limited knowledge who try to adopt an asset allocation strategy on their own run the risk of incurring losses if they are unable to assess the changing dynamics of an asset class. active. It is therefore advisable to follow the advice of the financial advisor or to invest in Multi Asset Allocation / Dynamic Asset Allocation funds offered by various UCITS.
The dynamic asset allocation fund by mutual funds might be a good option, especially in an age when valuations are expensive. Some of the funds operate on a quantitative model to achieve an optimal level of asset allocation. The model analyzes the changing trend of the variables and calculates the optimal level of asset allocation. The primary objective of these funds is to reduce the volatility of the fund through an optimal asset allocation. For example, when the markets are at high valuations, the model may suggest reducing exposure to equities and allocating a higher proportion to debt. In this way, protecting the investment from any potential market correction. In case of cheaper valuations or market corrections, the model may suggest increasing the allocation to equities.
Asset allocation as a strategy has its advantage. However, this involves complex models and a superior understanding of different asset classes. Investors may consider investing in dynamic asset allocation funds / multiple asset allocation funds offered by mutual funds professionally managed by qualified fund managers.
(By Jaiprakash Toshniwal, Senior Equity Research Analyst and Fund Manager – Equities, LIC Mutual Fund Asset Management Ltd)
Disclaimer: The opinions expressed here are the personal opinions of the author and are based on internal data, publicly available information, and other sources believed to be reliable. The information / data contained in this document is not sufficient and should not be used for the development or implementation of an investment strategy. Readers are advised to consult their financial planner before making any investment.