Importance of Asset Allocation

Market participants have seen extreme volatility in Indian capital markets. There have been many incidents both global and domestic which have led to a fall in the indices. At this point, we are facing a Nationwide Contagion Effect.

Some of the factors contributing to the market turbulence are as follows

• US-China Trade War

• NBFC Crisis following the IL&FS fiasco in domestic market

• Prolonged slowdown in critical sectors of the economy like Auto and Realty

• Asset quality issues, NPA’s which haunt Public Sector Banks

• Corporate governance issues, Audit failures and credit rating agencies failure to red flag critical issues

In this era of VUCA – Volatility, Uncertainty, Complexity and Ambiguity, our main focus is on risk mitigation and protection of principal. Return Of Capital rather than Return On Capital is the underlying motive. We will be exposed to Market Risk at all times, however Individual Company Risk can be Mitigated by Diversification & Asset Allocation.

The two main traditional assets are Debt and Equity. The asset classes are evaluated with respect to liquidity, safety, yield, image, appreciation and growth. Equity asset class is high risk high reward where there is possibility of high appreciation. In the case of debt returns are stable and tend to be lower with high degree of safety

A proper Asset Allocation based on the clients Risk profile is the most suitable and apt method.

Our Aim is to allocate risk to different Instruments / Assets.

Based on our research, The following Data shows us how diversification and Strategic Asset Allocation would have benefited the client. (All data shown below are as on 30 October 2019)

Market has shown a positive trend in the recent Months. There have been many positive aspects as well like Reduction in tax rates for Corporate Firms (22% for Domestic Companies & 15% for new manufacturing companies).The central bank cut the repo rate by 25 bps  to 5.15% and the reverse repo by 25 bps to 4.90% (100 bps = 1 per cent).

Based on this Allocation, the Investor has managed to diversify his risk to different categories of Asset Classes. There is equal Allocation to each Asset Class.

Based on this Allocation, The investor has been aggressive and is willing to withstand the Risk of Market Volatility. He has been able to generate Positive returns in all Periods.

Gold acts as a Hedge during Uncertain events. Gold has a negative Correlation with the traditional Asset Classes (Debt & Equity).The demand for gold increases during inflationary times due to its inherent value and limited supply.

Increased Allocation towards Debt helps the Investor earn Stable Return as compared to Equity & Gold. Returns maybe lower due to lower Returns.

Conclusion: Asset Allocation is Important for every Individual. Market Risk & Business Risk is something which every Investor goes through. Thus our main aim is Capital Protection and Risk Aversion. During Volatile Periods like now, we fear about Capital Erosion. Thus a hedge can be done via investing in different Asset Classes with low Correlation with each Other.

Latin Manharlal Group