Asset allocation is one of the most common terms we come across in the world of investment. You would have probably read dozens of articles on the importance and the ways of doing asset allocation in newspapers and on the internet. But do MFDs really put these theories into practise for deciding the asset allocation of their clients? Or does asset allocation look completely different in reality?
We spoke to MFDs to understand their process of asset allocation. And what we figured out is that MFDs have their own unique ways of arriving at right allocation.
According to MFD Rushabh Desai, every investor is different and their requirements vary. "Asset allocation is a personalised process. You can't just divide the corpus between various asset classes for the sake of asset allocation. It's said that if an investor is conservative, give him debt fund. But it's not that simple. There are various kinds of conservative investors and debt funds," the founder of Rupee With Rushabh Investment Services said.
However, the core process remains the same. For all the MFDs we spoke to, the first step is to determine the goals, time horizon and risk appetite of the clients. They also try to figure out the chances of a client requiring urgent liquidity.
"There are several aspects to it — goals, time frame, liquidity requirement etc. We have to see if the client may consider redeeming investments before the goal is achieved and if he has the money to meet urgent needs," said Garvit Chaharia of Deeva Ventures.
"The priority is to ensure that the client does not ends up with sleepless nights and that he achieves his goals in time," he added.
Importance of data
Although it’s important to look at every case separately, the importance of data in deciding asset allocation can't be overlooked.
Odisha MFD Prabir Sharma says that he uses past return data of equity and debt funds to arrive at the right asset allocation.
Prabir calculates the possible returns of various mix of equity and debt (preferably liquid and an equity index fund) using past data. Once that’s done, he determines as to which asset mix delivers good returns with minimum standard deviation.
The charts look something like this:
|
Year |
NAV (index fund) |
Return |
NAV (liquid fund) |
Return |
|
04-Jan-10 |
41.09 |
|
1,354.52 |
|
|
03-Jan-11 |
48.37 |
17.73% |
1,429.56 |
5.54% |
|
02-Jan-12 |
36.53 |
-24.48% |
1,558.93 |
9.05% |
|
01-Jan-13 |
46.87 |
28.31% |
1,710.03 |
9.69% |
|
01-Jan-14 |
49.68 |
6.00% |
1,870.41 |
9.38% |
|
01-Jan-15 |
65.21 |
31.25% |
2,042.86 |
9.22% |
|
01-Jan-16 |
62.99 |
-3.40% |
2,217.12 |
8.53% |
|
02-Jan-17 |
64.86 |
2.96% |
2,387.68 |
7.69% |
|
01-Jan-18 |
82.52 |
27.23% |
2,547.67 |
6.70% |
|
01-Jan-19 |
86.28 |
4.56% |
2,737.96 |
7.47% |
|
01-Jan-20 |
96.33 |
11.65% |
2,926.23 |
6.88% |
|
|
Index |
Liquid |
|
Mean |
10.18% |
8.02% |
|
SD |
17.03% |
1.37% |
|
Variance |
1.39% |
|
|
Co-Variance |
-0.03% |
|
|
Right Asset Allocation |
||
|
Index fund |
60% |
|
|
Liquid fund |
40% |
|
|
Mean |
9.31% |
|
|
Std Dev |
10.34% |
|
For Garvit, data comes in handy to determine the true allocation. "You need a good software to track the true asset mix of the portfolio. Every mutual fund scheme invests in a mix of assets. For example, most equity funds invest in stocks belonging to more than one market cap (large, mid and small). To arrive at the right allocation, you need access to complete data," he said.
The asset allocation process, as we see, is different for different MFDs. Data analysis and understanding the client and his/her needs play an important role in the process. We are sure that many other MFDs would be having their own unique ways of allocating assets. If you are one of them, please share it with us at newsdesk@cafemutual.com. We will try to include your process in the next article.
