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We all have been hearing about the benefits of asset allocation for quite some time now. But practicing asset allocation is easier said than done.
To help us understand the nitty gritty of asset allocation, Cafemutual hosted Suresh Soni, CEO, Baroda BNP Paribas Mutual Fund who shared some interesting insights on practicing asset allocation.
Let’s look at some key highlights from the session:
Practical tips to practice asset allocation
Everyone know that wealth can be created if an investor invests in equity funds for long term. But to ride volatility, you need patience and discipline. Hence, it is equally important to keep in short term volatility in mind and asset allocation can be the solution to this issue.
MFDs should follow a bucket approach to do asset allocation i.e. divide the investible corpus in two - three parts like short term, medium term or long term to deploy funds across asset classes.
Don’t take risk from short term funds. Put it in a safe asset class like fixed income funds. This way, your clients will be prepared for uncertainty and they can benefit from compounding that would happen by keeping long term assets intact.
Also, spread the money across uncorrelated asset class like equity, debt, gold, REITs and InvITs. If you recommend three large or small cap funds having similar feature – investment portfolio will rise and fall .
Our industry offers host of products in hybrid category that can take care asset allocation needs of clients.
Factors that every MFD should keep in mind
MFDs should be mindful of these three things - Client’s tolerance, time horizon and short time funding requirement to practice asset allocation. If we can address these three things then investment journey of clients gets easy.
Remember, the leadership of market keep changing. On analyzing data asset classes, we have seen some interesting trends – while equity outperformed other asset classes most of the time, 55% to be precise, gold outperformed other asset classes 30% of the time. Fixed income performed well almost 10% of the time.
This shows that you can’t chase asset classes. It is better to remain invested across all asset classes and there are products like balanced advantage funds and multi asset funds that can make asset allocation simple.
Frequency to do rebalancing for asset allocation
MFDs should pre-decide this frequency based on client’s situation. Ideally, it can be done once a year or once in three years. MFDs should also consider changes in life situation of clients like salary hike and birth of baby to do asset allocation. Another important factor is dislocation in markets. MFDs should take tactical calls when they see huge correction in equity markets.
Rationale for launching Baroda BNP Multi Asset
On analyzing some interesting numbers, we found that if we add gold to an investment portfolio of equity and fixed income, the return enhances especially during difficult times as gold is negatively correlated to equity. Overall, return of investment portfolio increases without raising the risk profile of investment portfolio.
For instance, during covid, equity market fell drastically but gold prices actually went up. In our view, multi asset funds deals with volatility without compromising significantly on returns.
Watch the complete episode by clicking here.
