‘Investors should not make abrupt switches in long-run allocation’

Chennai | Updated on September 27, 2020 Published on September 27, 2020

“A perfect match is won not just with sixes and fours, but also by picking defensive singles. Similarly, a perfect asset allocation should not only have sixes and fours (equity) in the portfolio, but also have defensive singles (debt) when the markets are volatile,” said Jeevan Koshy, Head, Tamil Nadu, ICICI Prudential Asset Management Company.

He was making a presentation at the Smart Investor webinar on ‘Asset Allocation in Volatile Market’, jointly presented by BusinessLine and ICICI Prudential Mutual Fund on Saturday.

Right asset collection

Batting for a right asset collection with a cricketing analogy at this peak IPL season, Koshy cited academic studies to point out that 92 per cent of an investor’s wealth creation happens due to proper asset allocation and not due to right stock selection or timing the market.

Speaking at the webinar, Aarati Krishnan, Editorial Consultant, BusinessLine, said asset allocation is important to avoid common investing mistakes like chasing assets that delivered good recent performance and ignoring risks because one is dazzled by the returns.

She said that thumb rules like “100 minus age” don’t work as asset allocation is a personal decision.

Krishnan said asset allocation is a function of many variables such as age (youngsters or retirees), life stage (individual or dependent), goals (short term or long term), liabilities (EMI commitments) and net worth.

She also laid out four approaches for asset allocation, which include risk-based allocation, goal-based asset allocation, steady-state allocation and dynamic asset allocation.

While the risk-based approach suggests investors to define their ability to bear losses and allocate accordingly, the goal-based approach suggests mapping out personal and family goals and deciding on the asset mix based on timelines (short, medium and long term).

“Once you create distinct baskets towards different goals, you will not be tempted to pull out money as and when there is something happening in the market,” said Krishnan.

The steady-state allocation suggests a fixed allocation, irrespective of market conditions, while under dynamic asset allocation an investor can make changes to his allocation based on relative attractiveness of assets using various metrics such as Nifty50 PE ratio, Nifty 500 PE ratio, and market cap to GDP ratio, among others.

Abrupt switches

She also said that during volatile times, investors should not make abrupt switches in their long-run allocation.

“Just because small cap stocks are doing well in the last 6 months, don’t switch the substantial portion of your allocation to small caps. Resist the temptation,” said Krishnan.

She also added that behavioural indicators are a useful input for good asset allocation decisions.

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Published on September 27, 2020
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