The importance of having an asset allocation does not need to be stressed, especially during a volatile market condition like the current one. Asset allocation helps an investor reduce risk and maximize returns by diversifying their investments in different asset classes such as gold, stocks, real estate and fixed income products according to their market cycles.
But, can asset allocation be a wealth creation solution for every investor? Are there any pitfalls in asset allocation? How and when should an investor start with asset allocation? What are the investment vehicles for a new investor to diversify his portfolio? These were some of the points covered during âCreating Wealth Through Asset Allocationâ, a webinar organized jointly by LIC Mutual Fund and the Hindu business line Friday.
âOften people see asset allocation as a way to maximize profits, but asset allocation is also a way to avoid regrets, because it saves investors some of the serious market situations, that would otherwise have excluded them from the market forever. Said Dhirendra Kumar, Founder and CEO of Value Research.
âWhen an investor sees a 5% change (in the market) on a weekly basis for a few weeks, it scares him. He might think that a 10% drop in the value of his investment may be permanent, âKumar said, adding:â But equity is a long-term game that takes conviction and the early years are very crucial. to create that conviction, âhe added. .
He suggested that new investors or those who don’t regularly follow the market could go the mutual fund route to do their asset allocation.
âMutual funds play a big role because when you rebalance your direct investments in stocks and fixed income each year you are required to pay tax, but mutual funds are a tax-efficient vehicle because you don’t have to pay tax until you withdraw the money, âKumar said.
Lav Kumar, Area Manager – West (Retail Sales), LIC Mutual Fund Asset Management, said emotions are the biggest enemy of investors and added that asset allocation not only supports the creation of wealth, but also meets the emotional needs of investors, especially when there is volatility in the market.
Lav pointed out that hybrid-class mutual fund systems such as Balanced Advantage funds help investors adjust their allocation between equity and debt based on market conditions.
“Investors looking for investment diversification, investors who are uncomfortable buying stocks at extremely high valuations, investors with an investment horizon of 3 years or more and those looking for Long-term wealth creation can turn to the Balanced Advantage Fund, âLav added. .
Kumar of Value Research said that Balanced Advantage Fund and Aggressive Hybrid funds are great vehicles for anyone trying to start a significant amount of money over a short period of time.
Regarding the allocation between various asset classes such as stocks, gold, real estate and deposits, Kumar said that a good allocation between equity and debt itself is sufficient and gold or jewelry should be viewed as a consumption and not an investment. He added that investors should consider fixed income instruments as the starting point for asset allocation, as they are more stable than stocks.
Regarding the active vs. passive allocation of mutual funds, Kumar said: âThere is a strong case for passive allocation against large cap funds, but the Indian market still holds a lot of promise in the markets. small and mid caps. Maybe, for a large cap allocation, you can buy a cheaper passive fund and the remaining money can be invested in mid and small cap funds. But rebalancing between them is the responsibility of investors, âKumar said.
The webinar was moderated by Parvatha Vardhini C, Head – Research Bureau, The Hindu Business Line.