DO NOT FORGET ASSET ALLOCATION

Rising equity markets can have a strange impact on investors. They become overconfident as far as their investment abilities are concerned. As a result, they often end up getting invested in avenues that they should avoid and end up taking on more risk than they should. Another impact of rising markets is that investors develop a myopic vision. For example at present, most investors refuse to touch a non-equity product even with a barge pole.

Let’s travel back in time to the year 2003 when monthly income plans (MIPs) were the season’s flavour. While the reasons for the popularity enjoyed by MIPs then are debatable, their utility isn’t, especially in a scenario like the present one. For a moderate risk-taking investor who is willing to take on marginally higher risk, MIPs offer the opportunity to clock higher returns vis-à-vis debt fund investments. Conversely, for a high risk-taking investor, MIPs offer the opportunity to incorporate a degree of stability in an equity portfolio. Sadly, a product that can value to the portfolio has been pushed to the sidelines.

This brings us to a more serious topic. By investing only in equity-oriented products, many investors have landed up with lop-sided portfolios. As a result, their asset allocation has been compromised with. And over longer time frames, it is asset allocation which can help investors not just safeguard their portfolios on the downside, but also create wealth.

By diversifying across assets, investors give their portfolios the flexibility to counter market uncertainties. Sadly, it is rather difficult to appreciate the importance of asset allocation in times like now, when equity markets have surged northwards almost consistently. In fact, asset allocation might be seen as a hindrance, since being fully invested in equities seems like a surefire method to clock impressive growth. However, it takes adversity (in this case, a sharp fall in equity markets) to fully appreciate the benefit of holding a portfolio populated by several assets.

My advice to investors – don’t get caught on the wrong foot by being invested in only one asset class (read equities) and ignoring asset allocation. Hold a portfolio comprised of various assets like fixed income instruments, real estate and gold, alongside equities. Obviously the allocation to each asset will depend on your risk profile and investment objectives. This is where a competent investment advisor will have an important role to play.