The Hindu Business Line : Tap the expanding fund of investment opportunities

Asset allocation has always been a mystery to an investor. In simple terms, it is the process of spreading your investments across asset classes with different risk-return trade-offs. It is a way of matching client risk profile to potential returns.

There are various kinds of asset allocations and most of us have heard our investment advisors using words such as optimum asset allocation, strategic asset allocation, or dynamic asset allocation. Most of your investment returns are influenced by how well you make your asset allocation choices, given your risk profile.

There is a breed of investors who have been speculators in the past and believe that they are experts in understanding the markets and know which investment avenue would give maximum returns.How do risk and life goals matter when they know how to take the bull by its horns They see themselves as fund managers and don't want professional help. To these investors, I would say: "Best of luck", as they indeed depend on luck to decide their fortune.

Protected against extremes

Asset allocation does not eliminate risk, but it can reduce your exposure to extreme highs and lows in performance. That means that a disciplined asset allocation plan will ensure that you meet your goals without taking too much risk.

It is important to keep reviewing your portfolio at least once a year and restructuring it to match your risk profile and ideal asset allocation at that point of time. Many investors would not have much time to do this. Hence, it is advisable to get a qualified financial planner to advise you regularly and help plan your financial goals and investment portfolio.

Today, there are various investment options , such as structured derivative products, contract for difference, international equity, international real estate and art that look complicated to an investor. It is inadvisable to invest in these instruments if one does not understand the underlying risk, which may not be in tune with one's risk appetite. These products are more suited to the well-informed investor. The fund route

So, what does a simple investor looking for variety in his portfolio do? The solution is a "Mutual Fund". Today, mutual funds have gone beyond simple debt and equity. . A mutual fund is a good option as it offers diversification, professional management, and economies of scale, liquidity and flexibility. Investors can manage changes in the asset allocation mix by shifting between various options available through the same fund house at a nominal fee. It is easy for the investor to track the best performing funds as newspapers and web sites offer considerable information.

Variety of solutions

Generally, under most asset allocation models, the investor would have his portfolio structured to include cash, debt and fixed-income instruments, equity and alternate investments. The proportion of cash and fixed-income instruments would be higher for an investor with a conservative or cautious profile. An aggressive or assertive investor would have a higher allocation to equity and similar investment options.

Under cash options, the investor can choose to keep his money in a short-term liquid or a floating rate fund. This way aninvestor can maintain his liquidity or meet his emergency needs from these funds. He can also wait for a suitable investment opportunity that may be available in the near future. In the fixed income options, he may consider short-term income funds, fixed maturity plans or monthly income plans. These invest mainly in debt instruments such as debentures, bonds, fixed deposits and government securities.

Equity offers a huge platter of options. Investors can choose diversified equity funds consisting of large, mid, small or flexi-cap or index funds. These are less risky than sectarian or thematic funds that aim at investing in specific areas such as banking, or those that fulfil certain objectives, such as gaining from investments in infrastructure. Equity Linked Saving Schemes, which have a three-year lock-in, can also get tax benefits. Now, many mutual funds offer investors a flavour of the international markets by investing a sizeable amount in global indices or stocks.

Hybrids help

Till about two years ago, investors were happy with a mix of cash, fixed-income and equity. But, today, the need to try newer investment products and leverage emerging opportunities has led to a greater demand for innovation by asset management companies. Hybrid funds is a product of this need that could fit in between debt-oriented and equity asset classes. The level of risk would be lower than equity funds but a little higher than fixed-income funds.

Many investors take up this option to increase depth in their portfolio and leverage the dynamic nature of these funds. Mostly Balanced funds, Capital Guaranteed funds and Dynamic Asset Allocator funds would come under this category.

Another rapidly growing choice is the alternate investment category.

This includes gold exchange traded funds (ETF), real estate fund, art fund or commodity fund.

Investors can derive comfort by entering these specialised avenues through the expertise of a qualified fund manager. While expert advice from financial advisors is available, it doesn't hurt to be an educated investor. This will keep the financial advisor on his toes and the chances of wrong calls are reduced.

Remember, in the long term, only a disciplined approach to asset allocation saves you from falling prey to market conditions.

(The author is Head, Training and Business Development, ASK Wealth Advisors Pvt Ltd. She can be reached at www.askwealthadvisors.com. The views are personal and do not reflect that of the organisation.)

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