Improper asset allocation is biggest impediment in wealth creation

By: |
New Delhi | August 14, 2018 12:47 AM

If you have invested money recently, it is not the time to pull out or exit. Try to understand, why are you investing and what is the expectation you have from the investment. And then re-jig, if required.

Improper asset allocation is biggest impediment in wealth creation (Illustration: shyam Kumar Prasad)

Investors are facing a unique situation this year. While the returns from BSE Sensex and Nifty indicies are in double digits for the calendar, the portfolio returns of many investors are in single digits or in the
red. More so, of the portfolio, which is less than a year old.

This is where one also needs to understand what is the structure of the Sensex. It is a 30-stock constituent, with each stock having a certain weightage. The top five stocks in the Sensex have more than 40% weightage with the 30th stock, bearing a weightage less than 1%.

Another feature being not all the constituents of the Sensex are driving the indicies up. Certain stocks with larger weightages are driving it up, as in Reliance and TCS, to name the larger names.

Investors’ allocation

Over the last few months, investors’ allocation has been typically in mid-cap and small cap to a larger extent. And with the mid and small-cap indicies going south, investors are seeing negative returns.
At the same time, retail investors have been increasingly investing in mutual funds. The Systematic Investment Plans (SIPs) have been reflecting a growing trend and so also the lumpsum investments. This is when the FIIs are taking the money out in 2018.

What does this data say and what should be the approach for an investor who has been investing for the past 6- 24 months?

Generating cash flow

Investing should never be about returns and only returns. Returns are integral and they drive the portfolio value. Investing is also about generating a constant cash flow across multiple months and years and if it can be secular and linear. So asset allocation, time horizon, liquidity—the framework which go on to develop a investment policy should be in place.

As an investor, one needs to understand and also acknowledge that the stocks, in which one has invested, can have periods of laggard growth, can be cyclical in nature and the changes in the eco-system can make or mar the performance. Invest in a mutual fund scheme or a stock only if you understand the fundamentals.

For instance,a tree takes time to grow. In the initial five years, the plant hardly grows. And from the sixth onwards. the growth is like a meteor. Also, when you plant a rubber tree, it takes at least 6 years for it to produce latex and start generating revenue to the owner. So, nature itself is a big teacher for investors.

Look at macro numbers

On a positive note, the June IIP (Index of Industrial Production) numbers has risen by 7% year-on-year, with the first quarter growth at 5.2%. The growth in capital goods, an important barometer of the economy, was at 9.6%.

So if you have invested money recently, it is not the time to pull out or exit. Try to understand why are you investing and what is the expectation you have from the investment. And then re-jig, if required. This can happen if you have invested your short-term monies into long-term investment products or vice-versa.

Equity as an asset class is generally with an investment horizon of three to five years. Anything less than this period, should be invested in fixed instruments with liquidity.

What kills an investor is not the returns or rather lack of it. It’s the improper asset allocation, which is the biggest impediment in the wealth creation journey.

An asset allocation process would help an investor to take both tactical and strategic calls in the investment portfolio.

The writer is managing partner of
BellWether Advisors LLP

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