Your Money: Follow the 12:20:80 asset allocation approach

Investors need to make decisions rationally and not let market noise or emotional biases get in the way of their mutual fund decisions.

Each equity investment within this portfolio needs to add a unique value to the portfolio.
Each equity investment within this portfolio needs to add a unique value to the portfolio.
By Rina Nathani

Some investors keep adding to their equity portfolio to capitalise on the bull run, exposing their portfolio to market risks. On the other hand, investors who fear losses make untimely redemptions, stopping their financial goals. Investors need to make decisions rationally and not let market noise or emotional biases get in the way of their mutual fund decisions.

Asset allocation means dividing up your assets in the right proportions among equities, debt, bonds, and gold to maximize your chance of achieving your financial goals while also trying to control investment risk. Follow a 12:20:80 asset allocation strategy. It is a DIY (do-it-yourself) strategy that investors can follow to help them reach their financial goals while reducing the risk of downside losses. When deciding to invest in a mutual fund, it is important to understand how best to diversify one’s mutual fund portfolio during uncertain times.

12: the safe money
The pandemic of 2019 was not the first major disaster that the world has seen. To prepare for emergencies, investors need to have a sound financial backup plan. As a general guideline, investors should have enough money to keep up with their consumption pattern for 12 months. This emergency fund can be invested in an open-ended liquid fund that follows the SLR (safety, liquidity, returns) principle. It means that investors should prioritise safety and liquidity over returns and should not take on additional risks to earn higher returns on this emergency corpus. One option for this investment is a liquid fund as they typically invest in government securities, certificate of deposits, commercial papers, treasury bills and PSU debt securities.

80:20 equity-gold allocation
After setting aside an emergency corpus, investors need to capitalise on gold’s risk-reducing and portfolio diversifying characteristics and consider allocating 20% of their portfolio to gold. Investors can consider gold ETFs or gold fund of funds which are liquid and price-efficient forms of investment.

Subsequently, investors can set aside the balance 80% of their portfolio in a diversified equity portfolio. This portfolio should be free from any style bias or sector/theme concentration. Each equity investment within this portfolio needs to add a unique value to the portfolio.

70:15:15 equity allocation
Investors can consider investing 70% of their equity allocation in an equity fund of funds that comprises equity mutual funds across various fund houses with a proven track record. Allocate 15% of the portfolio in a value fund. It will help their equity portfolio potentially earn long-term risk-adjusted returns during times of uncertainty. They can invest the balance 15% in an ESG mutual fund since it focuses on non-financial parameters like the environmental, social & governance of a stock.

Readymade allocation
Investors who wish to have a diversified portfolio and do not have the time to track multiple funds in DIY asset allocation can consider investing in the multi-asset fund of funds. Here the fund manager has the flexibility to follow a regular rebalancing approach within each asset class of equity, debt and gold, thereby giving them the potential to generate risk-adjusted returns through diversification of investments.

When investors have a combination of assets in the right proportion, they get the potential for risk-adjusted returns over the long term.

The writer is chief business officer, Quantum Mutual Fund

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