‘Asset allocation helps an investor reduce risk, maximise returns’

The importance of having an asset allocation needs no emphasis, especially during a volatile market condition such as the current one. Asset allocation helps an investor reduce risk and maximise returns by diversifying his investments into different asset classes such as gold, equity, real estate and fixed income products depending upon their market cycles.

But, can asset allocation be a wealth creating solution for every investor? Are there any pitfalls in asset allocation? How and when should an investor begin with asset allocation? What are the investment vehicles for a new investor to diversify his portfolio? These were some of the points discussed at ‘Creating wealth by asset allocation’, a webinar jointly organised by LIC Mutual Fund and the Hindu BusinessLine on Friday.

“Many a times, people look at asset allocation as a profit optimising vehicle but asset allocation is also a regret avoidance vehicle because it saves investors from some of the grave situations in the market, which would have otherwise driven them out of the market forever,” said Dhirendra Kumar, Founder & CEO, Value Research.

“When an investor sees a 5 per cent swing (in market) on a weekly basis for a couple of weeks, it scares him. He might think that a 10 per cent decline in his investment value may be permanent,” Kumar said, adding, “But equity is a long-term game which requires belief and the initial years are very crucial to create that belief,” he added.

He suggested that first time investors or those who don’t track the market regularly can take the mutual fund route to do their asset allocation.

“Mutual funds play a great role because when you do annual rebalancing of your direct equity and fixed income investments, you are liable to pay tax but mutual funds are a tax efficient vehicle because you are not liable to pay tax till you withdraw the money,” Kumar said.

Emotional needs

Lav Kumar, Zonal Head - West (Retail Sales), LIC Mutual Fund Asset Management, said emotions are the greatest enemy for investors and added that asset allocation not only takes care of wealth creation but also address the emotional needs of investors, especially when there is a volatility in the market.

Lav highlighted that hybrid category mutual funds schemes such as Balanced Advantage Funds helps investors adjust their allocation between equity and debt depending upon the prevailing market conditions.

“Investors looking for diversification of investments, investors who are uncomfortable buying stocks at extremely high valuation, investors with an investment horizon of 3 years and above and those investors who are looking for long term wealth creation can look at Balanced Advantage Fund,” Lav added.

Value Research’s Kumar said both Balanced Advantage Fund and Aggressive hybrid fund schemes are excellent vehicles for anyone who is trying to start a meaningful amount of money over a brief period of time.

On allocation among various asset categories such as equity, gold, real estate and deposits, Kumar said proper allocation between equity and debt itself is enough and gold or jewellery must be looked at as a consumption and not investment. He added that investors should look at fixed income instruments as the starting point of asset allocation since these are steadier than equities.

Proper allocation

On active versus passive mutual funds allocation, Kumar said, “There is a strong case getting built up for passive allocation against large cap funds but the Indian market still holds a lot of promises in the small cap and mid cap. Maybe, for large cap allocation, you can buy a cheaper passive fund and the remaining money can be invested in mid cap and small cap funds. But rebalancing among them is the investors responsibility,” Kumar said.

The webinar was moderated by Parvatha Vardhini C, Head - Research Bureau, The Hindu BusinessLine.