Times that trigger a change in asset allocation
Over the past few days, financial advisors and distributors have witnessed an increasing number of customer calls. Most of these are anxiety calls because of the massive fall in the equity indices spread over a period of just a few weeks. The customers today can be segregated into the following categories:
Amid all this noise that has accompanied the market mayhem the importance of asset allocation is being stressed by AMCs and advisors alike. Asset allocation means allocating your money across different investment avenues in order to get the desired return for the investor’s portfolio. The investor’s money can be allocated to various financial and non-financial products. Financial products include banking products like fixed deposits, equity products like stock trading, mutual funds & ULIPS and non-market linked products like debt mutual funds and traditional insurance plans. Prominent non-financial products include investing in real estate or purchasing gold. The basic aim behind an investor’s asset allocation is to get the maximum return at the desired level of risk.
Asset allocation is a technique that is often overlooked by investors (as well as many advisors) during the period of a boom as most of the products are giving above-average returns to the investor. It is during turbulent times that one starts to evaluate the allocation of their money across products. Asset allocation is a continuous process and periodic review of the portfolio to match it with the investor’s goals is a must in order to get superior performance.
This brings us to the question that when do we have a look at our asset allocation and decide if we need to change the same. Well, we have some simple steps following which one can ascertain in case they need to have a look at their current asset allocation and change it for good.
Investment is done to achieve certain financial goals. A change in goal triggers the reallocation of the assets. Based on the duration and urgency of the goals the investor can be categorized as conservative, moderate and aggressive. For instance, if the investor wants to save money for a child's education expenses which are to be incurred 5 years from now, the investor can't be categorized as aggressive even though the time period is sufficiently large. The money at the end of 5 years is required for a pressing need which couldn't be postponed. Now, consider the same investor wants to save money for a trip to Europe. Here, the investor can take sufficiently aggressive bets and in case the investments don't give desired results after 5 years the trip can be postponed.
A shift in the investor category triggers the need for asset reallocation. Continuing our child education example, if at the end of the third year, the child secures a scholarship then the investor's goal changes and money can be reinvested based on the new goal which may also mean that the investor category changes.
The goal of asset allocation is to give a portfolio which is a mix of financial products with more exposure to the product which optimally meets with the risk-return profile of the investor. If a conservative investor has majority exposure in small-cap mutual funds this indicates imbalanced exposure. These are the instances when a change in asset allocation needs to be triggered and such anomalies are more visible during the times of market crash because during the period of boom such anomalies may give extraordinary results to the investors who may not bother to complain (and may not even genuinely know the counter risk involved) about the same to their advisors. Imbalanced exposure may lead to the investors not meeting their desired goals and necessitates a change in asset allocation.
Under normal circumstances, the asset allocation strategy is consistent over a long term period as investor goals and preferences don’t change over the short term but there are times when markets throw short term opportunities that need to be captured in order to get superior returns. This is when tactical asset allocation comes to play. As an example, if an investor sees the interest rate scenario to be in a downward trend for the near future, a portion of the portfolio can be allotted to high duration debt funds in order to get the advantage of capital gains in case of rate reduction. Tactical asset allocation is usually done by tinkering a small portion of the investor's existing portfolio. Also, there are times when a particular investment avenue is due to close forever and maybe available at a higher price in the future. Change in life insurance premiums, downward movement of traditional plan returns are some cases where quick action can help save money and also get better returns.
A change in government regulation can also trigger a change in asset allocation. Investors are more concerned with the way their income from financial products is being taxed by the government and any changes in the same are closely watched. For example, the introduction of LTCG on equities in 2018 budget led to investors shifting from dividend option of mutual funds to growth option.
Asset allocation is of paramount importance in the field of personal finance and due care should be given to the subject by the investors as well as their advisors. Every investor has different preferences that should be thoroughly studied before making a decision about the allocation. Wrong asset allocation can be counter-intuitive to the investor’s goals and due care should be given to avoid mistakes while allocating money. Get in touch with your advisor right away to know if your money is allocated to suited asset classes.
- The excited ones who want to invest more money in equity markets in the form of lumpsum and SIP.
- The anxious ones who aren't sure how to go through times like these i.e. whether to invest more or wait for more correction.
- The scared ones who are willing to withdraw their holdings even if it means suffering a heavy loss.
Amid all this noise that has accompanied the market mayhem the importance of asset allocation is being stressed by AMCs and advisors alike. Asset allocation means allocating your money across different investment avenues in order to get the desired return for the investor’s portfolio. The investor’s money can be allocated to various financial and non-financial products. Financial products include banking products like fixed deposits, equity products like stock trading, mutual funds & ULIPS and non-market linked products like debt mutual funds and traditional insurance plans. Prominent non-financial products include investing in real estate or purchasing gold. The basic aim behind an investor’s asset allocation is to get the maximum return at the desired level of risk.
Asset allocation is a technique that is often overlooked by investors (as well as many advisors) during the period of a boom as most of the products are giving above-average returns to the investor. It is during turbulent times that one starts to evaluate the allocation of their money across products. Asset allocation is a continuous process and periodic review of the portfolio to match it with the investor’s goals is a must in order to get superior performance.
This brings us to the question that when do we have a look at our asset allocation and decide if we need to change the same. Well, we have some simple steps following which one can ascertain in case they need to have a look at their current asset allocation and change it for good.
- Change in investor’s category/goals
Investment is done to achieve certain financial goals. A change in goal triggers the reallocation of the assets. Based on the duration and urgency of the goals the investor can be categorized as conservative, moderate and aggressive. For instance, if the investor wants to save money for a child's education expenses which are to be incurred 5 years from now, the investor can't be categorized as aggressive even though the time period is sufficiently large. The money at the end of 5 years is required for a pressing need which couldn't be postponed. Now, consider the same investor wants to save money for a trip to Europe. Here, the investor can take sufficiently aggressive bets and in case the investments don't give desired results after 5 years the trip can be postponed.A shift in the investor category triggers the need for asset reallocation. Continuing our child education example, if at the end of the third year, the child secures a scholarship then the investor's goal changes and money can be reinvested based on the new goal which may also mean that the investor category changes.
- Imbalanced exposure
The goal of asset allocation is to give a portfolio which is a mix of financial products with more exposure to the product which optimally meets with the risk-return profile of the investor. If a conservative investor has majority exposure in small-cap mutual funds this indicates imbalanced exposure. These are the instances when a change in asset allocation needs to be triggered and such anomalies are more visible during the times of market crash because during the period of boom such anomalies may give extraordinary results to the investors who may not bother to complain (and may not even genuinely know the counter risk involved) about the same to their advisors. Imbalanced exposure may lead to the investors not meeting their desired goals and necessitates a change in asset allocation.
- Static Vs. Tactical Asset Allocation
Under normal circumstances, the asset allocation strategy is consistent over a long term period as investor goals and preferences don’t change over the short term but there are times when markets throw short term opportunities that need to be captured in order to get superior returns. This is when tactical asset allocation comes to play. As an example, if an investor sees the interest rate scenario to be in a downward trend for the near future, a portion of the portfolio can be allotted to high duration debt funds in order to get the advantage of capital gains in case of rate reduction. Tactical asset allocation is usually done by tinkering a small portion of the investor's existing portfolio. Also, there are times when a particular investment avenue is due to close forever and maybe available at a higher price in the future. Change in life insurance premiums, downward movement of traditional plan returns are some cases where quick action can help save money and also get better returns.
- Change in government regulation
A change in government regulation can also trigger a change in asset allocation. Investors are more concerned with the way their income from financial products is being taxed by the government and any changes in the same are closely watched. For example, the introduction of LTCG on equities in 2018 budget led to investors shifting from dividend option of mutual funds to growth option.Asset allocation is of paramount importance in the field of personal finance and due care should be given to the subject by the investors as well as their advisors. Every investor has different preferences that should be thoroughly studied before making a decision about the allocation. Wrong asset allocation can be counter-intuitive to the investor’s goals and due care should be given to avoid mistakes while allocating money. Get in touch with your advisor right away to know if your money is allocated to suited asset classes.
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