Talking at Cafemutual Confluence Investment Marathon 2021 (CCIM 21), Vidya Bala, Founding Partner & Head, Research and Product, PrimeInvestor shared with us the three key steps for creating an ideal portfolio - asset allocation, choice of funds and plan of action to maintain the portfolio.
Here are the excerpts of the session.
Asset allocation
Investors’ time frame determines their risk capability and also the broad asset allocation range.
|
Time frame |
Equity% |
Debt% |
Gold% |
|
0 to 6 months |
0 |
100 |
0 |
|
6 to 12 months |
0* |
100 |
0 |
|
1 to 2 years |
0** |
100 |
0 |
|
2 to 3 years |
0-15*** |
85-100 |
0 |
|
3 to 5 years |
15-50 |
50-85 |
0-10 |
|
5 to 7 years |
40-65 |
35-60 |
0-15 |
|
7 to 10 years |
50-70 |
30-50 |
0-15 |
|
> 10 years |
50-80 |
20-50 |
0-15 |
* Investors in high tax bracket having product understanding can consider arbitrage funds
** Investors can consider equity saving for tax efficiency
*** Investors can consider hybrid like BA
Choice of funds
Portfolios for beginners/small investments could comprise 2-4 funds with no extreme risk funds in equity or debt. Over time, it can go up to 6-12 funds. The choice of funds is a function of time frame, risk appetite and the role each fund category plays in a portfolio.
Equity
To curtail the overall portfolio volatility, each fund category is allocated a specific proportion. These volatilities are reflected through their standard deviation based on 1-year returns rolled daily for last 3 years
|
Category |
Standard Deviation |
|
Large cap |
18.4 |
|
Multicap/Flexi cap and others |
22.5 |
|
Large & midcap |
22.0 |
|
Midcap |
26.0 |
|
Smallcap |
35.7 |
Within equity, the asset mix is influenced by investors’ risk profiles.
|
Investors’ Risk |
Model Allocation |
|
Moderate |
40% in large cap, 20% in large & mid cap/multi cap, 30% in flexi cap and balance 10% in international funds |
|
Moderate to high |
25% in large cap, 30% in flexi cap, 20% in mid cap, 10% in small cap and 15% in international funds |
|
High risk investors |
50% in flexi cap, 15% in mid cap, 15% in small cap and 20% in international funds |
Debt
Certain fund categories should be held for at least a certain period for allowing them to play out through cycles.
|
Category |
Min. time frame |
Nature of risk |
|
Overnight & liquid |
1 month and over |
Insignificant |
|
Ultra short/low duration/ floating rate |
3 months and over |
Low to moderate credit risk and liquidity risk |
|
Short duration/banking and PSU |
2 years and over |
Moderate to high for short duration. Low for banking & PSU debt |
|
Medium duration |
3 years and over |
Credit risk |
|
Corporate bond |
3 years and over |
Low duration risk at times |
|
Gilt |
3 years and over |
Duration risk |
|
Credit risk |
5 years and over |
Credit and liquidity risk |
Investors should diversify short-term debt across AMCs, even if that means duplication. However, when it comes to long-term debt like high-quality low credit risk categories such as dynamic bonds or corporate bonds, duplication must be avoided.
Talking about the internal asset-mix, investor’s time-frame plays a crucial role here.
|
Time frame |
Model Allocation |
|
3-year portfolio with liquidity |
15% in ultra short/low duration, 15% in floating rate, 20% in short duration/banking & PSU, 50% in corporate bond/medium duration |
|
3-year portfolio |
15% in floating rate, 35% in short duration/banking & PSU, 50% in corporate bond/medium duration |
|
5-year portfolio |
10% in floating rate, 30% in short duration/banking & PSU, 50% in corporate bond/medium duration, 10% in gilt/credit risk |
|
5-year portfolio with liquidity and lower volatility/credit risk |
10% in ultra short/low duration, 10% in floating rate, 30% in short duration/banking & PSU, 50% in corporate bond/medium duration |
Hybrid
Hybrid funds, which are a pre-mix of debt and equity, play a limited role as mutual fund portfolios comprise both these asset classes.
Plan of action to maintain portfolio
Plan of action to maintain portfolio helps to choose between actives and passives.
Active funds call for active management - annual rebalancing and half yearly review. However, they should not be over-reviewed. On the other hand, passive funds are recommended where regular reviews are difficult. However, they should be rebalanced annually.
Watch this video to know in detail what Vidya suggests.
