Asset allocation as a strategy has stood the test of time
Investment is a marathon not a sprint and Wealth Creation is a long-term process. Although, the power of compounding may unleash its effectiveness during its later years. The fact remains that events like market corrections and black swan events do put a dent on your corpus at least for short-term period. Historic data indicates that, during the period of deep cuts, the portfolio value may go down to as low as 60-70% (Source: NSE) from its immediately preceding peak value. Equity market has seen two strong years of rally and if some experts were to be believed, market is catching fatigue and is exposed to volatility as we enter 2022. This has made many investors jittery. Thus, there is a need for a strategy that can help investors navigate through the cuts and market crash without significant impact on their corpus.
Asset allocation is one such strategy that has stood the test of its time in safeguarding investor corpus and has led to long-term wealth creation. It’s an investment style where Investors diversify by investing in different uncorrelated asset class, such that any sharp correction in one asset class does not have any cascading impact on other. It follows the philosophy of ‘Don’t put all your eggs in one basket at all the time’. In this style of Investing, investor aims to be opportunistic and switches from one asset to another based on his outlook on the different asset class. There are many forms of Asset allocation combinations currently available with asset class based on the risk appetite of investors such as Equity, debt, gold, commodity, currency, real estates, Real Estate Investment Trusts (REITS), Infrastructure investment trusts (InvITs), etc. A prominent one is investing in Equity, Debt and Arbitrage fund. Today, Mutual funds offer various asset allocation schemes across different combinations of asset classes.
Strategies to consider
As the say goes ‘Rome was not built in a day’. Adopting asset allocation is easier said than done. It involves having an unparallel knowledge and understanding of various asset classes. What asset class to choose, how much should be the asset allocation, when to enter which asset class and when to exit from which asset class. Investor with limited knowledge trying to adopt asset allocation strategy by themselves tend to ‘skate on thin ice’ by taking risk of incurring loss if they are unable to gauge the changing dynamics of asset class. It is therefore advised to ‘Play it safe’ and take guidance of the financial adviser or invest in Multi asset allocation/ Dynamic Asset Allocation funds offered by various mutual funds.
The dynamic asset allocation strategy could emerge as a preferred option for 2022 where markets are expected to remain volatile. Some of the funds run on a quant model for arriving at an optimum asset allocation level. The model analyses changing trend in the variables and calculates the optimum asset allocation level. The prime objective of such funds is to reduce the volatility of the fund through optimum asset allocation. For example, when markets are at expensive valuations, the model may suggest reducing exposure in equities and allocating higher proportion to debt. That way safeguarding the investment from any potential market corrections. In the event of cheaper valuation or market correction, the model may suggest increasing higher allocation back to equites.
Asset allocation as a strategy has its advantage however it involves complex models and having superior understanding of various asset class. Investors may consider investing in Dynamic asset allocation fund/ Multi Asset Allocation Fund offered by mutual funds which are professionally managed by trained fund managers.
Authored by Dinesh Pangtey, Chief Executive Officer, LIC Mutual Fund Asset Management Ltd.
Disclaimer: The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information / data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risk and uncertainties that could cause actual results, performance, or event to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in the future. LIC Mutual Fund Asset Management Ltd. / LIC Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investment made in the scheme(s). Neither LIC Mutual Fund Asset Management Ltd. and LIC Mutual Fund (the fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipients before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.
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