By Rina Nathani
Some investors continue to enrich their equity portfolio to capitalize on the uptrend, thereby exposing their portfolio to market risk. In contrast, investors who fear losses make unwanted redemptions, halting their financial goals. Investors should make rational decisions and not let market noise or emotional biases get in the way of their mutual fund decisions.
Asset allocation means allocating your assets in the right proportions between stocks, debt, bonds and gold to maximize your chances of achieving your financial goals while trying to control investment risk. Follow a 12:20:80 asset allocation strategy. This is a do-it-yourself strategy that investors can follow to help them meet their financial goals while reducing the risk of downside losses. When deciding to invest in a mutual fund, it is important to understand how to best diversify your mutual fund portfolio in times of uncertainty.
12: safe money
The 2019 pandemic was not the first major disaster the world has seen. To prepare for emergencies, investors must have a solid financial back-up plan. As a general rule, investors should have enough cash to follow their consumption pattern for 12 months. This emergency fund can be invested in an open liquid fund according to the SLR principle (security, liquidity, yield). This means that investors should prioritize safety and liquidity over returns and not take additional risk to earn higher returns on this emergency corpus. One option for this investment is a liquid fund as they typically invest in government securities, certificates of deposit, commercial papers, treasury bills, and PSU debt securities.
80:20 Gold Equity Allocation
After setting aside an emergency corpus, investors should capitalize on the risk reduction and diversification characteristics of the gold portfolio and consider allocating 20% of their portfolio to gold. Investors may consider gold ETFs or gold funds of funds which are liquid and profitable forms of investment.
Subsequently, investors can set aside the balance of 80% of their portfolio in a diversified equity portfolio. This portfolio must be free from any bias in style or sector / thematic concentration. Each equity investment within this portfolio should add unique value to the portfolio.
70:15:15 distribution of shares
Investors may consider investing 70% of their equity allocation in an equity fund of funds that includes equity mutual funds from various proven fund houses. Allocate 15% of the portfolio in a value fund. This will help their equity portfolio generate long-term risk-adjusted returns in times of uncertainty. They can invest the remaining 15% in an ESG mutual fund because it focuses on non-financial parameters such as environment, social and governance of a security.
Investors who wish to have a diversified portfolio and do not have the time to follow multiple funds in DIY asset allocation can consider investing in the multi-asset fund of funds. Here, the fund manager has the opportunity to follow a regular rebalancing approach within each equity, debt and gold asset class, thus giving them the potential to generate risk-adjusted returns through the diversification of investments.
When investors have the right mix of assets, they get the potential for long-term risk-adjusted returns.
The author is Chief Business Officer, Quantum Mutual Fund