5 MinsMarch 30, 2020
An important investment lesson from the coronavirus outbreak is that asset allocation is the cornerstone of investing. Asset allocation refers to sensibly apportioning your investible surplus across asset classes such as equity, debt, and gold
or even holding cash in a savings bank account for that matter.
For instance, if we evaluate on a year-to-date basis, most equity markets across the world have been in the red (some have even posted double-digit negative returns). The S&P BSE Sensex has clocked -27.6% absolute returns as of March 20, 2020.
When will there be an end to this downside is unknown. Whether the easy monetary policy stance of central banks --- with rate cuts and ensuring enough liquidity --- will arrest would prove supportive, is also uncertain.
On the other hand, gold as an asset class has clocked +5.1% absolute returns as of March 20, 2020. In the calendar year 2019 as well, gold clocked an absolute return of +24% in rupee terms outperforming the returns clocked by Indian equities.
This proves that all asset classes do not necessarily move in the same direction (up or down) always – over the long-term; some may even move in the opposite direction as what we have seen in the recent past (in the case of equities and
gold). Plus, each asset class carries a certain level of risk with the expected return.
Returns of three asset classes across varying time frames:
*Axis Bank FD rates for respective time periods considered
#Equity returns considered are that of the S&P BSE Sensex
Note: Returns for time periods over 1 year are compounded annualised
When investing, you should always define your asset allocation considering your age, income & expenses, asset & liabilities, risk appetite, broader investment objective, your financial goals, and time to achieve the envisioned goal/s.
This will help you strike a balance between risk and reward while you invest.
Key benefits of asset allocation:
✓ Invests in various asset classes
✓ Optimises portfolio returns;
✓ Minimises portfolio risk;
✓ Aligns investments as per financial goals being addressed and the investment time horizon;
✓ Makes market timing irrelevant;
✓ Facilitates tax planning
Diversification within types of assets
Once you decide asset allocation, you need to diversify within each asset. Consider the features of each asset along with your risk profile, investment objective, time horizon, and liquidity needs.
When building an equity portfolio, consider investments in stocks and equity mutual funds. Consider investing in respective market capitalisations --- bluechips, predominant large-caps, mid-caps, and small-caps --- paying heed to fundamentals
of the companies you wish to invest (and do not rely on tips). Also, amongst the equity mutual funds consider the sub-categories not just by market capitalisations, but also by investment styles viz. value, contra, growth, or blend. Visit
the Mutual Fund section on our website to choose the best-performing equity mutual funds in 5 minutes.
While building a portfolio of debt investments, consider bank fixed deposits, small saving schemes, and debt mutual funds. Amongst debt mutual funds there are sub-categories viz.
money market funds liquid funds, duration funds, credit risk fund, corporate bond funds, dynamic bond fund, gilt funds, etc. Understand the features of these schemes as well as take into consideration the current interest rate scenario. Do
keep in mind that investing in debt funds is not risk-free. If you prefer to keep your capital safe, prefer bank fixed deposits and/or small saving schemes.
[Read: Types of Mutual Funds]
Gold as an asset class usually holds a negative correlation with other assets. It typically helps to protect wealth in times of geopolitical tension, depressed global economic growth, heightened volatility in financial markets and when the future
looks uncertain. Hence, it makes sense to tactically allocate around 10-15% of your entire investment portfolio to gold.
To treat any ailment and stay healthy, you need the right medical treatment and dosage of medicine. Similarly, your investment portfolio needs just a fair amount of diversification to clock optimal risk-adjusted returns. Hence make a conscious
effort, not to over diversify. Finally, just as you undergo regular check-ups to stay healthy, do not forget a periodic review of your investment portfolio to secure your financial future.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.