Wealth creation is a lengthy-term approach. They say, investment is a marathon not a sprint. And rightly so, the longer you keep invested, the lesser influence the brief-term cuts/ corrections have on your portfolio. While the energy of compounding gets effective when you invest for a longer period, events like marketplace corrections and black swan events do place a dent in your corpus at least for the brief-term period.
Historic information indicates that, throughout the period of deep cuts, the portfolio worth may perhaps go down to as low as 60-70% (Source: NSE) from its quickly preceding peak worth. Thus, there is a need to have for a method which can assist investors navigate by means of the cuts and marketplace crash with out important influence on their corpus.
Asset allocation is one such method which has stood the test of time in safeguarding investor corpus and has led to lengthy-term wealth creation. Asset allocation is an investment style exactly where investors diversify by investing in various uncorrelated asset class, such that any sharp correction in one asset class does not have any cascading influence on the other. In this style of investing, the investor aims to be opportunistic and switches from one asset to one more based on his outlook on various asset class.
There are numerous types of asset allocation combinations presently readily available with asset classes based on the threat appetite of investors such as equity, debt, gold, commodity, currency, true estate, Real Estate Investment Trusts (REITS), Infrastructure Investment Trusts (InvITs) and so on. A prominent one is investing in equity, debt and gold exactly where investment in equity is aimed for capital appreciation, investment in debt for principal protection and gold as a protected heaven. Another mixture is Equity, Debt and Arbitrage Fund. Today mutual funds provide several asset allocation schemes across various mixture of asset classes. Multi asset allocation fund has confirmed to be advantageous more than a longer period.
Adopting asset allocation, nevertheless, is much easier mentioned than accomplished. It requires possessing an unparalleled expertise and understanding of several asset classes. For instance, what asset class to opt for, how significantly must be the asset allocation, when to enter which asset class and when to exit from which asset class. Investors with restricted expertise attempting to adopt an asset allocation method by themselves run the threat of incurring losses if they are unable to gauge the altering dynamics of any asset class. It is, as a result, advised to take guidance of the economic adviser or invest in Multi Asset Allocation/ Dynamic Asset Allocation funds presented by several mutual funds.
The dynamic asset allocation fund by mutual funds could be a fantastic solution in particular at a time when valuations are pricey. Some of the funds run on a quant model for arriving at an optimum asset allocation level. The model analyses altering trend in the variables and calculates the optimum asset allocation level. The prime objective of such funds is to minimize the volatility of the fund by means of optimum asset allocation. For instance, when markets are at costly valuations, the model may perhaps recommend minimizing exposure in equities and allocating greater proportion to debt. That way safeguarding the investment from any prospective marketplace corrections. In the occasion of more affordable valuations or marketplace corrections, the model may perhaps recommend escalating greater allocation back to equites.
Asset allocation as a method has its benefit. However, it requires complicated models and possessing superior understanding of several asset classes. Investors may perhaps contemplate investing in Dynamic Asset Allocation Fund/ Multi Asset Allocation Fund presented by mutual funds which are professionally managed by educated fund managers.
(By Jaiprakash Toshniwal, Sr. Equity Research Analyst & Fund Manager – Equity, LIC Mutual Fund Asset Management Ltd)
Disclaimer: The views expressed herein are the author’s individual views and are based on internal information, publicly readily available information and facts and other sources believed to be reputable. The information and facts / information herein alone are not enough and must not be utilized for the development or implementation of an investment method. Readers are advised to seek the advice of their economic planner just before creating any investment.