Asset allocation: use a goals-based approach, diversify investments across asset classes to combat volatility


By Reshma Banda

Indian markets have been buoyant since April 2020 and are among the best performing indices in the world. The current pandemic has contributed to increased volatility with numerous lockdowns hampering economic activity. The sharp rise in inflation supported by a rise in commodity prices contributed to an increase in interest rates in all geographical areas. With global markets trading near all-time highs in this macro backdrop, we would tend to be a bit cautious as a short-term correction cannot be ruled out.

Volatility is an inherent characteristic of the capital market which can be referred to as one of the “risk” factors. Investing in a single asset class would be categorized as relatively “high risk” portfolios and should be matched with risk appetite, age, goals, etc. of the policyholder/investor. From a personal finance perspective, having a diversified investment portfolio across all asset classes for an individual would provide stability and balance across the whole body. Thus, while investing in 2022, investors can strategically diversify their investments according to their individual risk profile and investment objectives. His portfolio must be able to meet his future capital and income needs while providing cash in case of an emergency. Let us understand the key aspects while making asset allocation decisions for the portfolio.

The importance of asset allocation in managing your portfolio

Different asset classes offer varying returns over different time periods. As the chart below shows, stocks as an asset class have outperformed other asset classes over the years. Similarly, debt, gold and cash have outperformed other asset classes in different years. Therefore, it would be prudent to have a mix of different asset classes in your portfolio. Asset allocation should be reviewed from time to time, and this becomes especially important during times of uncertainty. Investors can choose their asset allocation based on their risk appetite and investment horizon. We also recommend that investors use a goals-based approach to asset allocation.

Annual calendar performance of the different asset classes (in %)

Source – Bloomberg. Asset classes represented by the following indices: Debt (Crisil Composite Bond Index), Cash (Crisil Liquid Fund Index), Large-Cap Equity (Nifty 50 Index), Mid-Cap Equity (Nifty Midcap 50 Index), Gold (MCX , Spot gold index). CY returns are absolute. Past performance may not be an indicator of future performance

Invest systematically, because market timing is difficult. Patience is the key to wealth creation

Systematically investing in stocks contributes to Rupee Cost Averaging i.e. it averages the cost of your investments and hence reduces the results of short term market fluctuations on your investments. In fact, in a falling market, the SIP (Systematic Investment Plan) will help to acquire more units for the investor. Overall, SIP helps take the guesswork out of investing, as market timing can be difficult even for a seasoned investor. However, the key word here is “patience”, necessary for the creation of wealth.

A longer investment horizon – reduces the chances of realizing negative returns on equities

The famous investor Warren Buffet once said: “The stock market is a means of transferring money from the impatient to the patient”. Therefore, by investing for the short term, the investor may experience intermittent volatility/losses in the market. However, the long-term (patient) investor is rewarded, and historical data also suggests that the odds of realizing negative stock returns, for a longer holding period (greater than 5 years), decrease significantly.

Health and life insurance is a must

The past year has taught us the importance of insurance as an investment. Health insurance not only protects out-of-pocket payments in the event of a medical emergency, but also prevents funds from running out, while a pure life insurance plan provides adequate coverage at low cost and allows the family to remain financially viable in the event of the death of the winning member. Investors can consider a guaranteed income plan that provides guaranteed income payments for a predetermined period of time with life coverage, suitable for all risk profiles. This is a stable and convenient way to earn a regular income with the tax exemption provided for in Section 10(10D) of the Income Tax Act 1961, subject to the conditions therein. stated.


The bottom line approach is to significantly diversify your portfolio across various available investment avenues and not simply follow the lucrative returns of a distinct asset class. Each asset class has its own attributes and an appropriate allocation can maximize the risk-adjusted returns of the overall portfolio over the long term. It is advisable to consult your financial adviser before investing, this will not only help you to create a portfolio according to your needs and your capacity to take risks, but will also allow you to choose the right option for your investment.

(Reshma Banda, Head–Equity & Executive Vice President, Investments, Bajaj Allianz Life. Opinions expressed are those of the author.)


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