How to do Asset Allocation the Right Way | Best Mutual Fund Asset Allocation Strategies | ETMONEY

Isolated chemical elements can be very volatile like sodium or chloride, but when the same elements come together they form something spectacularly useful. In this case, being table salt, an investment portfolio is no different from a chemical compound when we invest in fixed deposits,

mutual

fund

s, stocks, etc. The underlying element of our investment portfolio is the multiple

asset

classes where money is invested. These

asset

classes range from bonds to stocks, gold commodities, real estate cash futures, and even bitcoins and derivatives. Hello everyone, my name is Shankarnath and in this video we expand. our understanding of one of the most important aspects of investing, which is asset

allocation

, in the next 15 minutes we'll look at what asset

allocation

really means before detailing three different asset allocation

strategies

you can implement in your portfolio of investments starting today, very similar to our previous videos.

You will also have a lot of facts and ideas, so take your time to absorb as much as possible and feel free to post your comments in the comment box below the Hindi subtitles. Let's start diversifying your portfolio across multiple assets. It is an accepted practice, as it helps spread. Financial planners love this concept, and if you've been reading a little about

mutual

fund

s or personal finance, you've probably seen a chart like this. This colorful chart represents the changing nature of asset performance over time. years, for example, in 2016, debt performed the

best

among all asset classes, in 2017 it was domestic stocks, cash in 2018, international stocks in 2019 and gold in 2020. five different years, five different high-yield assets , it is not uncommon to see financial advisors portray this same image. which comes with its own slogan and a warning that says "don't put all your eggs in one basket", but asset allocation is much more than this, so let's start our understanding with the definition itself, in a nutshell, the Asset allocation is the process of investing in diversified assets. classes there are two words one should focus on here a is a process and b the assets are diversified let's start with the process asset allocation is a process because it constantly seeks to balance risk and return in an investor's portfolio, the purpose here is to achieve a better risk-adjusted return for the portfolio, let's understand this with a simple b-school 101 graph, so on the x-axis we plot the risk and on the y-axis we have the returns that now traditionally the return and the risk are positively correlated and By that logic, we can plot multiple points anywhere on the graph.

Let's draw two benchmarks, one where we receive a low return for taking low risk, so it's a low point, and one where higher returns come from taking higher risk, so it's a high point. Now, the purpose of asset allocation should be to achieve a better risk-return equation for the investor. This graphically means that the goal here should be to set up your investment portfolio in such a way that you either achieve higher returns with the same risk, or you achieve the same level of return but with lower risk; In other words, you go from a high high to a mid-high or from a low low to a mid-low.

Both moves represent an improvement in your risk-adjusted portfolio performance, which is the real goal. of doing asset allocation, the second point in our definition of asset allocation is investing in diversified asset classes, diversified being the word diversified trader in the context of asset allocation means assets that are not correlated in terms of their performance, let me explain this with a pair As examples, the chart here shows that over the last two decades the performance of stocks and gold has been quite tangential over different time periods. This clearly shows that stocks and gold have a weak correlation and therefore constitute two diversified asset classes, which is good for development.

An Asset Allocation Strategy The second example we have here features the Nifty 50 Index and the Nifty Mid Cap 150. Notice here that the performance of the Nifty 50 and Mid Cap 150 is quite closely correlated over long periods of time. In this case, we have taken the performance data of the last 15 years, this means that having a portfolio consisting of only nifty 50 and mid cap 150 does not really serve our asset allocation purpose, although it could have other advantages. In fact, let's plot gold's performance at the top of the same chart. Look at the divergence in the performance of gold against the two stock indices in many years To summarize what we have learned here so far, always remember two points: An asset allocation is effective only when it is done as a process that improves your risk equation -reward and Second, it works more efficiently when the assets have a weak correlation.

In the next section, we discuss the different asset allocation

strategies

that are available to you, but before we move on to that, don't forget to allocate yet another asset that is available to you and that asset is none other than you, who subscribe to the eti money youtube channel where we present videos on how to invest in mutual funds, nps insurance and many other topics that will help you earn some money or save some money. Asset allocation strategies are of two types. Tactical Asset Allocation and Allocation Strategic asset allocation refers to techniques that aim to provide a long-term focus to your investment portfolio.

Here are two commonly used approaches. The first approach is the age-based asset allocation technique. This is where the investment decision is based. Based on the age of the investor, this approach calculates the proportion of recommended capital assets in an investor's portfolio as a result of deducting the investor's age from a base value of 100, for example, if he is 35 years old according to the age-based asset allocation we use. Subtract 35 from 100 and conclude that 65 percent of your portfolio should be in stocks. While this approach is something of a start to asset allocation, it is clearly not enough since this approach does not take into account important variables such as your investment objective and risk profile.

Let's move on to the second approach to strategic asset allocation, which is the risk profile-based asset allocation method. This method is certainly an improvement over the age-based method and uses investors' risk tolerance to determine how assets should be divided. The way it works is very simple, all investors including you and me can be classified as conservative investors with balanced income growth or aggressive investors. Each of these five labels signifies the amount of volatility one can take on in their portfolio, for example, a conservative investor is risk averse and prefers a stable rate of return even if it means compromising a small or large amount of returns.

Similarly, an aggressive investor focuses on performance and understands the variable nature of performance where investments can rise and fall sharply over a shorter period of time now that the investor is classified. This asset allocation strategy happens to provide a fixed percentage of the asset class to each risk profile, sort of like the table you see on your screen. Now very quickly, the table here says that the suggested long-term asset allocation for a conservative investor is 15 percent in domestic stocks, five percent in gold and the rest eighty percent in debt instruments, then as the risk profile changes from conservative to income, from balance to growth, and then aggressive, notice that the proportion of stocks and gold increases, while the proportion of debt decreases if you are wondering where these percentages come from, I can certainly tell you that they do not We calculate none of these percentages.

These percentages are the average of three or four different studies that we read on the internet as part of our research to create this video, but this is what we did once we compiled this table, we tested these percentages with the actual data available to us, so there are four asset classes here: domestic stocks, international stocks, bonds and gold. Now fortunately for backtesting we found that all assets had some benchmarks available in the form of index funds, so we have the nifty 50 index, which represents domestic stocks, the nasdaq 100 index for international stocks, the india snp bse 10 year sovereign bonds for bonds and finally for gold we again use the quoted price of gold in india as a benchmark.

There are dozens of indices to choose from, but we settled on these four because the data here was readily available and it made sense to use them in our study now that data from these four indices had been examined for a decent number of years, 15 years prior. To be precise, we extracted the annual returns of each index over these years and pleasantly noticed that there were many years of negative correlation between stocks and bonds and also between stocks and gold, which is good and close to what we are looking for in When it comes to diversification, the next step for us was most important when we completed this annual performance data on our five risk profiles.

This approach helped us calculate the returns that a conservative income balanced growth and an aggressive investor should have achieved by applying the weights we had discussed above. Here we go, we won't get into the data too much, but keep in mind that as the risk profile goes from conservative to aggressive, the variability in return increases and that's what risk profile based asset allocation is all about: It is a structured way of ensuring that your risk tolerance receives the highest consideration when deciding which asset to invest in; This risk profile-based asset allocation is certainly an improvement over the age-based strategy and can be a good methodology to adopt for very long-term goals.

As your retirement, before we move on to tactical asset allocation, let's go back to the table once again where we had the asset allocation for conservative, balanced and aggressive investors. Now let's add a table showing the performance of the four asset classes, which is the neat thing. 50 Nasdaq hundred, the ten-year bond and gold. What's interesting to note here is that if we hadn't allocated assets and put our entire portfolio target at, say, the nifty 50, we would have achieved a return close to what a balanced investor would have achieved. Over these 15 years, if you connect back to what we had said earlier in the video, the idea behind asset allocation is to improve risk-adjusted returns and this table really demonstrates that because the breakeven investor actually ended up generating the same returns as the resourceful 50. investor, but did so while taking on significantly less risk.

This is the essence of asset allocation and something that should never be forgotten, as the name suggests, tactical asset allocation aims to improve your risk-adjusted returns by taking advantage of short-term opportunities. without losing sight of the long-term direction; In other words, tactical asset allocation attempts to give investors the

best

of all worlds. This is achieved by using active management or risk return models to increase or decrease exposure to certain asset classes based on macro fundamental valuations and of course market movements, I'm sure this sounds a bit complicated. , so let me simplify it by talking about a set of mutual funds that actually do this tactical asset allocation as part of their offerings.

Dynamic asset allocation funds are a category of funds. They follow a methodology of adjusting their investment ratio based on market ups and downs and often move between equity debt and cash. These dynamic asset allocation funds are also known as balanced advantage funds and the principle here is simple, as market opportunities change, so they should. Asset allocation and hence the word dynamic, these funds operate on the principle of reducing overall portfolio risk by exiting risky investments that have abnormally high valuations and enhancing returns by purchasing assets with low valuations. A good way to understand this is by analyzing the portfolio of one of the largest funds in this category, the icici prudential balance advantage fund, what we have here is the last 12 months of net capital held by this fund.

Notice how the front changes the capital ratio depending on the levels of themarket, so when the stock market situation in March and April 2020, the fund increased the equity portion up to 74 percent and then in December of the same year when the stock market began to reach all-time highs , the dynamic asset allocation model focused on reducing portfolio risk. By reducing the equity ratio to 40, this is the very essence of tactical asset allocation strategy that aims to align asset allocation with market conditions. In this final section we will present some quick tips and strategies to help you plan your The best advice for asset allocation is that you don't frame yourself and start adapting to the conditions, for example, many investors often simply decide that I am a conservative investor or I am an aggressive investor and continue to play that role for many years.

The problem with this approach is that they miss out on big opportunities or end up taking too much risk, so always remember when circumstances change, so if you allocate your assets, our second tip is customization. What I mean by this is that you cannot choose an out-of-the-ordinary option. shelf asset allocation strategy your strategy has to be unique to your objectives your current situation your risk appetite and your investment horizon a third piece of advice and this is based entirely on our experience is that it is absolutely fine to have multiple strategies for multiple objectives , in fact this is something we recommend as it allows you to intelligently group your investments based on the goal you are pursuing - for example, your retirement goal, which is 30 years away, might have a different asset allocation strategy compared With a five-year goal we could have a completely different strategy.

Tip four, which we have already talked about before, is to choose diverse assets, most returns have a low correlation with other asset classes and a final tip is that asset allocation needs periodic monitoring and adjustments throughout over time to ensure that the actual performance of your portfolio is within the scope of your objectives. This is where rebalancing comes into the picture and we will have a video on this. Soon and with this we will reach the end of this video. I hope you like this video and gain many learnings from the data and ideas presented. Don't forget to subscribe, like, comment and share this video with your friends and colleagues.

Thanks for watching and I look forward to catching up with you next week with another insightful video. Until then, investments in mutual funds are subject to market risks. Carefully read all documents related to the plan.