Here’s how to build an investment portfolio with varying asset allocation

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Updated: Jun 22, 2020 8:48 PM

Diversification across asset classes is the key for serious investors if they want to have better risk-adjusted returns.

 mf portfolio analysis, Gold ETF, Mutual Funds, investment portfolio, asset allocationMutual Funds Asset Allocation Model: Link your investments in any asset-class to your long term goals.

MF Asset Allocation: The Nifty 50 is down by about 15 per cent year-till-date (YTD) while the 3-year return is just about 6 per cent. For an equity market investor, who has been investing for quite some time now, the performance of the mutual fund portfolio may not paint a lively picture either.

In the middle of the COVID-19 pandemic, with corporate earnings looking to be lower than before, equity investors, including mutual fund investors, may be concerned about their current portfolio. Even those who have their SIPs in equity funds may be considering to stop their future SIPs or even exiting from them. But, should they do that? “No, SIP should not be stopped by a mutual fund investor. Rather, the SIP amount should be increased as investors who invest in volatile times will generate much better risk-adjusted returns in the future,” says Amit Jain, Co-founder & CEO, Ashika Wealth Advisors.

The stock markets by nature are supposed to be volatile and one, therefore, even for a long term investors it is important to follow certain investment strategies. “Investors should follow a strategic and staggered investment process rather than making a haphazard lumpsum,” says Jain.

For overall better portfolio returns, it’s essential that one maintains the right asset allocation and does not depend on the performance of any one asset class. “Investors should now focus on moving the money with a different strategy of ‘Invest Rightly, Switch Timely’, across asset class & product categories” informs Jain.

As and when your investments in different assets generate a decent return or is above your target returns, it’s better to book gains and deploy the gains in the assets which is under-performing. “We suggest, a periodic re-balancing should be done across asset class & different product categories,” says Jain.

Equity Vs gold

The recent performance of equity Vs gold as an asset class has clearly shown the importance of asset allocation. “In our view, right asset allocation becomes the key as we have seen in the past, bull market in one asset class may simultaneously exist with bear market in another asset class. Classic example is the inversely co-related performance of the stock market and gold ETF in the last one year. Hence, diversification across asset classes is the key for serious investors if they want to have better risk-adjusted returns,” informs Jain.

Gold has so far in 2020 generated a return of over 20 per cent and is expected to go higher. “We are bullish on gold from a long term perspective, as we feel, COVID-19 started as a health crisis, became a financial crisis and will end up as a geo-political crisis. In such uncertain times, gold always outperforms other asset classes. Hence, we are advising 20% allocation in gold ETF by keeping at least a 5 year Investment horizon in mind,” says Jain.

MF portfolio analysis

The way you build a portfolio with varying allocation into different assets determines the final return in your portfolio. “For a specific strategy, we suggest investing 60 per cent in arbitrage funds, 20 per cent in gold ETF and 20 per cent in international equity funds. From arbitrage funds, we should transfer money into selected equity MF’s in the next 5 months through a staggered process of investment,” says Jain. Take the current situation as an opportunity to do a MF portfolio analysis and build a robust one for better long term risk-adjusted return.

MF for short term investment

But, not all investors may be comfortable with the current situation in the stock markets and economy in general. Some of them will want to wait for better market levels and want to keep funds in MF for short term investment for liquidity and better post-tax returns.

“Arbitrage funds perform better in volatile markets. Global stock markets will remain volatile because of COVID-19, high Global debt, negative GDP growth & increasing geo-political tensions. This category of mutual fund provides hedge against the volatility in the markets & also they are taxed at equity level taxation. Ultra HNI investors with a higher tax slab tend to earn more in arbitrage against any other debt liquid category,” says Jain.

Which MF scheme

The COVID-19 pandemic and its impact on the economy is expected to change the consumption patterns to a large extent. So, which sectors should MF investors focus on while investing in MF schemes?

Amit Jain says, “From a medium to long term perspective, Investors should focus on some selected equity MF schemes which have higher exposure to these sectors – Affordable automobile preferably 2 wheeler, IT Companies which are focusing on Artificial intelligence & Automation, Telecom and Pharmaceuticals

International funds

After the big crash in the global stock market, the US stocks, in particular, have rebounded to levels seen in early 2020. But, should Indian investors allocate some money in international funds now? “Yes. International funds are the best hedge against depreciating rupee and deteriorating GDP performance of Indian Economy. On March 23rd when the Global markets hit the rock bottom, that was the right time to invest in International equity Mutual fund schemes.  Investors who missed investing in March should wait for better entry points in this product category as Global markets have already bounced back near to their last peak, particularly NASDAQ,” says Jain.

What to do

Rather than jumping from one asset or investment to another, depending on the returns, build an all-weather long-term portfolio with varying exposure to different assets. Once you have done that, give time for the performance to be seen and ignore any short-medium term volatility in them. Above all, link your investments in any asset-class to your long term goals.

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