Asset Allocation

Market moves in cycles and different strategies work in different phases of cycles. Identifying cycles and positioning the portfolio accordingly can be tricky at times. One simple way to overcome this difficulty is “Asset Allocation

Asset allocation is the process of deciding what percentage of your money to put into different asset classes such as stocks, bonds and cash.

Each asset class responds differently to shifts in the economy and financial markets; some investments may be up while others may be down. With asset allocation, a portfolio may experience less fluctuation in value than individual assets within the same portfolio.

Having a disciplined approach towards investing helps in generating above average returns. Investing with discipline involves selecting investments that are in line with an overall asset allocation and diversification strategy based upon your needs, goals, time frames and your ability to assume risk. To meet their goals, investors must carefully identify their financial objectives and an investment mix to help them reach those goals.

Higher the risk, higher the reward – Is This True?

It is generally believed that, Higher the risk, higher the reward. But Asset allocation helps you in achieving similar (sometimes better) returns with lesser volatility. To give an example, since January 1995 we analysed HDFC Equity Fund and HDFC Balanced Advantage Fund (earlier HDFC Prudence Fund). Both the funds are from the same fund house and are managed by the same fund manager in a similar style. While HDFC Equity is a Multicap fund, HDFC Balanced Advantage fund is an asset allocation fund having close to 75% equity and 25% debt exposure.

As seen from the table, HDFC BAF has delivered better Risk-Adjusted Returns

Asset allocation technique may have a significant impact on the ultimate success of your portfolio. In fact, asset allocation has more influence on portfolio variance than any other single investment decision. In an important study published by the research team of Brinson, Singer, and Beebower in 1991, asset allocation was shown to account for as much as 91.5 of the variation in total return, far outweighing other significant factors such as market timing and security selection.

Developing Your Investment Strategies with Your Advisor

For deciding your Asset allocation framework, the following factors are to be considered:

  1. Time Horizon
  2. Risk Tolerance
  3. Investment vehicles
  4. Planned current and future contributions
  5. Goals

Asset allocation is not a static strategy. To be effective, an asset allocation plan should be reviewed periodically. Also, any changes in your financial goals, lifestyle, time frame and financial circumstances coupled with changes in market conditions, could necessitate revision of your asset allocation plan.

Strategies for Alpha creation

Generating returns over and above the benchmark i.e. generating “alpha” is primary motive of almost all the investors. Sometimes simple strategies lead us to wonderful results. But key part is to execute these strategies without fail.

Here we will discuss some common strategies which can help you beat benchmark (Nifty 50).

  1. Market timing
  2. Active Fund Management 
  3. Passive Re-balancing – Asset Allocation discipline


Market timing simply means identifying market cycles and investing in times when market are rising and stay away from equities when markets are falling. This is not at all easy and one needs to have lot of understanding of multiple components and first-hand experience at-least 2-3 cycles. Flip side of this is going wrong on market call can significantly erode your wealth.

Active Fund Management

This strategy can yield you alpha in a fairy consistent and dependable manner but you need to bet on right horse (Choosing the right Fund & intern the Fund manager). Again, there can be periods (like CY 2018) where markets can be extremely narrow (only selected few stocks gaining whereas rest of the market struggling). To understand these intricacies of the markets and chose right funds you need able, attentive and active Financial Advisors.

Asset Allocation discipline

“Don’t put all your egg in one basket” is what it at the core of this strategy. Proper asset allocation and periodic re-balancing can help you generate alpha over long period of time in a consistent and dependable manner. To give an example, Nifty 50 index has delivered 11.41% CAGR return over 23-year period. If you had invested 80% of your assets in Nifty 50 and 20% of assets in an income fund (Debt mutual fund) and had done re-balancing every year your return would have been ~ 12% surprisingly more than Nifty 50 returns. This happens because when equities fall debt component help protect downside and hence saves capital erosion.

But again, to reduce equity exposure when equities are giving handsome returns and on a similar note reducing debt when equities are looking lackluster can be a tough mental challenge. In the game of investing often greed and fear take out rational thinking. A Financial Advisor who have seen cycles, understands how to select funds and disciplined enough to help you stick with your asset allocation will help you generate “Alpha” over Medium to long term horizon.

Election and Uncertainty

The election commission of india has came out with calander for general elections.

Recently, the election outcome related uncertainty alongwith tensions at the border have kept markets jittery. The media is creating more noise (as always) and adding to the chaos.

In the light of uncertainty what a long term investor should do

  1. Book profits and reduce exposure to Equities or
  2. Add to equity exposure or
  3. Do nothing

Looking objectively to market movements during and post elections in the past should help in answering above questions to some degree. Below table compiles market movements across last 7 elections and presents information about BSE Sensex performance 6 months prior to elections and 12 months post elections, split as 6 months immediately after election and Next 6 months.

As evident in above table, in 5 out of 7 periods of 6 months prior and post-election, the Sensex has delivered positive performance.

Key takeaways:

  1. If you stay invested, the probability of making money in election year is high.
  2. The Negative return outcome for 6 months post-election are concentrated in 1997 -1998 years which was period of Asian Financial Crisis.
  3. CAGR of BSE Sensex from 1994 to 2018 comes to ~11% and The 6 month period both pre and post are significantly higher than 11% for the most of the positive return.

So what is your plan to handle the uncertainty erupting from elections?

  • Being an Equity Investor you have to be an Optimist. Hence “Staying Invested” will prove to be the best strategy for the most of us. The above table confirms that it pays to stay invested even in an election year!
  • Equity return are not only outcome of political situation but also of Global market performance, Currency movement, inflation, interest rate, GDP growth, Profit growth, fund flows and host of other factors who have very low connection with election outcome. Hence focusing on only Election outcome will lead to missing the signal coming out from other factors.
  • Although past events as shown in above table shows high probability of making good returns in election year, one should not become over optimist and add aggressively as uncertainty still remains and the future might not pan out in the same way as in past.
  • For a long term investor who is looking at investing for funding children education or own retirement, the best way to approach elections as an event which will come every 5 years and will pass by. One should stick to the investment plan and follow the asset allocation discipline. This will allow you to buy more when the markets come down on disappointing outcome.

Financial Advisor like us who are experienced enough will help you to in sticking to your plan and handhold in this period of uncertainty and help you one step in achieving your financial objectives

Inflation – The Silent Killer

Financial planning is like a guiding map. But one needs to understand that it is just a tool and the output is just a function of what input we feed in.

One of the most important and tricky variables to feed, in any financial plan is “Rate of Inflation”.

Inflation denotes a rise in the general level of prices. Inflation reduces the purchasing power of each unit of currency.

For Each, His Own

Although, inflation number is published on a monthly basis by MOSPI and it tells us about increase in a general price level, it is not at all comprehensive indicator of how your expenses have moved. Inflation for various individuals having various socioeconomic backgrounds, life stages and behavior pattern is different.

To give an example price of iPhone 4 launched in May 2011 was Rs. 40,900 and iPhone X launched in November 2017 costed Rs.80, 600, which means prices of iPhone have grown at 13% CAGR. In the same period CPI has grown by 6.7%.   As our standard of living improves our inflation also increases. If you plot your expenses over last 5 years you will realize how our consumption pattern has changed. Our day-to-day expenses either get expensive or as our standard of living improves, we move to more branded and expensive things.

Understanding Real Return

The real return is simply the return an investor receives after the rate of inflation is taken into account. For example, if my investment is yielding me 7% return and inflation during the same period was 5% then my real return is 7% – 5% = 2%.

As an investors we need to be cognizant of the fact that whether we are getting returns which are more than the Inflation rate. If not, our ability to purchase same good in future is getting hampered.

So, while planning for the future we need to keep this silent thief away from eating into our pie