Asset allocation is a very important element to successful investing. In this video, ETMONEY’s Shankar Nath takes you through what asset allocation really means as we detail three different asset allocation strategies that you can deploy on your investment portfolio starting today. This video will be packed with a lot of data and insights and comes with Hindi subtitles which you can access by tapping on the CC button
What’s covered in this video?
01:30 What is Asset Allocation
06:38 Strategic Asset Allocation
13:12 Tactical Asset Allocation
15:38 Useful Tips and Strategies
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WHAT IS ASSET ALLOCATION?
Asset allocation is the process of investing across diversified asset classes. There are two words one needs to focus on here – a) it’s a process and b) the assets are diversified.
a) Asset allocation is a process because it is constantly looking to balance the risk and returns in an investor’s portfolio to achieve the better risk-adjusted return
b) Diversified in the context of asset allocation means assets that are not correlated in terms of their performance. For example – a weak correlation can be seen when we compare the NIFTY 50 performance with that of Gold over a twenty-year period.
STRATEGIC ASSET ALLOCATION
Strategic Asset Allocation refers to techniques that are aimed at providing long-term focus to your investment portfolio.
There are two commonly used approaches here.
1. Age-based asset allocation where the proportion of recommended equity assets in an investor’s portfolio is simply the balance of the investor’s age from a base value of 100.
2. Risk-profile-based asset allocation method which focuses on classifying an investor in one of five buckets i.e. conservative, income, balanced, growth, or aggressive investor.
Each of these 5 labels signifies the amount of volatility that one can take in his or her portfolio. For example – a conservative investor is risk-averse and prefers a stable rate of return even if it means compromising on a little or a lot of returns. On the contrary, the aggressive investor is return-centric and understands the variable nature of performance where investments can rise and fall heavily over shorter time periods.
Now, once the investor is classified, this asset allocation strategy goes on to proportion a fixed percentage of the asset class to each risk profile as we have explained in the video.
In our study, we go on backtest the results with four asset classes i.e. domestic equities, international equities, bonds, and gold. This backtesting helped us prove the point that a balanced investor could have made comparable returns to a NIFTY 50 only investor but by taking much less risk in his or her investment portfolio.
This is the essence of asset allocation and something that one should never forget
TACTICAL ASSET ALLOCATION
Tactical asset allocation aims to improve your risk-adjusted returns by taking advantage of short-term opportunities without losing sight of the long-term direction.
This is done by using active management or risk-return models to increase or decrease exposure to certain asset classes based on macro fundamentals, valuations, and of course, the market movements.
An existing mutual fund category that does this is the dynamic asset allocation funds that follow a methodology of adjusting their investment proportion based on the highs and lows of the market often moving between equity, debt, and cash. These funds are also called balanced advantage funds
In the video, we show you the net equity position of the ICICI Prudential Balanced Advantage Fund and how it has changed it over the 12 months of the year 2020
USEFUL TIPS & STRATEGIES
1. Don’t get boxed i.e. try not to make up your mind that you are a conservative investor or an aggressive investor. Doing this will make you miss out on opportunities or you might end up taking too much risk
2. Build a strategy per your present situation, goals, and risk type
3. Allocate assets differently for varied goals (but don’t overdo it)
4. Choose diverse assets whose returns have a low correlation with other asset classes
5. Periodically monitor and adjust the allocation
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