Investing Success: The Power of Asset Allocation

The stock market’s been on a seemingly nonstop march upwards this year until the last month or so, when a multitude of voices began asking whether such a sharp rise was warranted. In such markets most of us go through emotional swings and have a tendency to jump from one strategy to another. To this we say: keep your long-term investment goal in mind, ensure you have a proper asset allocation of your funds, and you don’t have to worry. Strategy comes later; first you need to do asset allocation wisely! The great part is that it’s a lot simpler to implement than it sounds – the hard part is avoiding the itch to drastically change that long-term allocation with every move in the market.

How to go about doing your asset allocation?

Asset allocation is the key to achieving healthy long-term returns. It refers to how you split your investments across different asset classes (equity, debt, cash/fixed deposits, gold, real estate being the main ones) based on your individual preferences, goals and risk profile. Through simple diversification, asset allocation helps in limiting risks and reducing the volatility of returns.

Before investing in any asset class, you should decide your financial goals and check your liabilities. Make sure you have enough in regular income or extra cash set aside to comfortably pay off those liabilities over a reasonable time frame. Debt doesn’t have to be a bad word – after all, not many folks can afford a house or a badly-needed form of transportation with cash on hand. The key is not to overdo it. Some level of debt is totally fine – if you can borrow at 8% but earn 12% or more over the long term, then you don’t need to panic and pay down every last rupee of debt as fast as you can (though admittedly the psychological freedom of being debt-free is worth something!). If you approach it responsibly and don’t overextend yourself, you can quite easily construct a long-term allocation plan that allows you to take on a few manageable liabilities here and there and be comfortable.

That leads us to our next point: it can be fruitful to be on the receiving end of those interest payments by investing in debt, too!

Many investors have mismatched their risk appetite to their asset allocation, either due to inattention or inertia over time – or being downright afraid to pull the trigger on an allocation change. A simple rule of thumb is to subtract your age from 100 and use that as your equity allocation. (So a 20 year-old would have around 80% in equities, while a 60 year-old would be more appropriate at 40% equities.) Managing a few percent around those levels ought to serve you well over the long term.

Your asset allocation may deviate from your target in situations like the present, in which the stock market continues to hover near all-time highs. Uncertainties abound and you may not want to redeem your current funds. Meanwhile you’re not sure you want to plow all your extra monthly savings into more equity investments, but then again you don’t want to miss out on capitalizing on future earnings growth! In times like this, a balanced fund makes a lot of sense. But it’s imperative to make sure you know what you want – an equity-oriented balanced fund may not really reduce that much risk for you, as it’s required to still keep 65% in equities. Sure there are tax benefits to that*, but the actual benefit pales in comparison to the added risk you could be taking by having 70% or 80% in equities – remember, 65% is a minimum for those funds, not a maximum – when your actual allocation should be 40% or 50%! The Quantum Multi Asset Fund offers the flexibility of investing in 3 asset classes – Equities, Debt, and Gold – and it dynamically changes its allocation depending on the economic environment. Thus, you can worry less about adding to or redeeming from Equity or Debt Funds if the Markets are touching new highs or if interest rates have moved dramatically. Quantum Multi Asset Fund takes care of all such situations on its own.

Remember

1. Have a plan, know why you’re investing – for your long-term future.

2. Stick to that plan, and you need only review it once in a while; avoid the temptation to do it every time the market oscillates. That mentality will not fail you over the long term.

At Quantum, our investment strategy does not change with changing market scenarios – we’ll keep doing what we’ve always done, and that’s looking out for our customers’ best interests.

* The Quantum Multi Asset Fund qualifies as a Debt Fund for tax purposes, so gains from the fund up to 3 years will be taxed as Short Term Capital Gains (as per your Tax Slab), while gains above 3 years will be taxed as Long Term Capital Gains (20% with indexation benefits). If you are a long term investor, don’t worry too much about those Capital Gains, because after indexation the tax doesn’t affect your overall returns that much. To know more about it, please write to us at [email protected]

Name of the Scheme & Primary Benchmark	This product is suitable for investors who are seeking*	Risk-o-meter of Scheme
Quantum Multi Asset Fund of Funds (An Open Ended Fund of Funds Scheme Investing in schemes of Quantum Mutual Fund)	• Long term capital appreciation and current income • Investments in portfolio of schemes of Quantum Mutual Fund whose underlying investments are in equity , debt / money market instruments and gold	Investors understand that their principal will be at Moderately High Risk<

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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