Wikipedia defines Asset Allocation as the implementation of an investment strategy that attempts to balance risk versus reward. It further states to achieve this, you need to adjust the percentage of each asset in an investment portfolio according to your risk tolerance, goals and investment time frame.
By this, we know an asset allocation requires investment in different assets to meet your financial goals, depending on your time horizon and most importantly, based on your ability to take a risk.
A google search for ‘asset allocation’ throws up 165 million results. This should tell us that it is one of the most discussed aspects of investing. Everyone - from a financial advisor to an asset manager, an investment expert to investment platforms will tell you about the importance of having an asset allocation.
Once esoteric, today, there are online tools that can help anyone build and implement an asset allocation plan by clicking a few buttons.
However, as important and easy as it may seem, we all struggle to maintain a disciplined investment balance.
This piece is one such look into how an investment plan actually works in the real world. This is my own example; My own financial goals, my investment plan and my asset allocation.
Through this, I’ll try and bring out my thinking, my discipline and ofcourse my mistakes. What I hope to convey is that it is indeed simple and cost-effective to implement. Also, once set to work, it can free your ‘mind and time’ to focus on other important things in life. For me, this has been the biggest benefit of creating an investment and asset allocation plan.
I’m 42 years old now. I’m currently a Chief Investment Officer and I have been in the world of investing since the start of my career in 2002. However, until about 2012-2013, I had no investment plan. I had no clear asset allocation.
The Mistakes:
I was investing, of course, but with no clear intent. I made my usual rookie mistakes of thinking I’m smart (I still think I am 
) and can easily identify stocks. I rode the entire IPO bandwagon of 2007-2008, some of which I sold only in 2015, of course at a loss!
Working in Quantum Mutual Fund, which pioneered the low cost, no entry load, direct investing model, helped me steer clear from being trapped in the ‘ULIP’ mania. I have publicly referred to ULIPs of that time (2004-2008) as the biggest financial scam in India.
However, despite being in Quantum, I could not resist myself from investing in some ‘HOT’ NFOs of other mutual funds.
I pride myself on market timing. I am a fund manager; ofcourse I am supposed to be good at market timing. And I was! I invested in the market on March 9, 2009. Go check the charts; that was the lowest point of the markets. However, more than half of the stocks I chose either went bankrupt or performed poorly. My investments in ETFs and mutual funds fared better. This learning was crucial. Timing of investments is not the only important thing. Another realization that, despite being an investment professional, I am in no way immune to mistakes in direct stock selection.
Oh, I also made another cardinal ‘financial’ mistake of over-leveraging myself to buy a second residential property. I also had to liquidate my existing investments. This thing completely dislocates your investment and asset allocation plan, upsets your return calculations and can set back your other financial goals by a few years. Of course, the purchase and sale of a house are as much or more of an emotional family decision than a financial investment decision. Most of us will just have to deal with that reality.
The Success:
Even for an investment professional like me, my actual investment journey began once I did a financial planning exercise. My family had expanded by then and I felt the need to become more structured in the way we plan our finances.
The best thing about the financial planning exercise was to involve my wife in it. I would recommend everyone to have a financial plan and more importantly involve your spouse/family in that exercise.
As I said, today, you can do it yourself online or reach out to a financial planner. Mapping out your finances – your income, expenses, goals, assets and liabilities – is extremely important in your investment and asset allocation journey.
Again, I will not say I have followed all the recommendations of the financial plan, nor have I reviewed it since. However, the clarity of what needs to be done and the simplicity and ease with which you can achieve it were eye opening even for an investment professional like me.
The pre Investment Process:
The first thing I did was to buy an online term life insurance for upto 65 years for myself. I decided the sum assured to cover my home loan plus 2 years of my annual income. Thus, if anything happens to me, my family has a house to live in and some money to tide over.
The next thing I did was to increase the medical insurance for the family. I also took an individual extra cover for my dependent mother.
I also decided to have at least 12 months of expenses in a very safe place with no risks as an emergency corpus. On average, half of that corpus remains in my bank savings account and the other half is in a safe Liquid Fund.
Investment and Asset Allocation:
I have three broad goals and thus three different investment plans and asset allocation.
- Wealth creation; 2) Retirement and 3) Daughters education corpus
1) Wealth Creation: Time Horizon – 30 years; Current Risk Tolerance – High;
• Allocation: Equities – 65%-75%; Debt – 20%-30%; Gold – 5%
• Diversified Equities only through mutual funds –
o Only 3 funds – a Value, a Multi-cap and a small cap fund. Two ongoing monthly SIPs. One fund used for lump-sum and market timing. 3 funds may be less, but my personal investing bias prefers concentration over too much diversification.
• Debt – only for safety of capital, liquidity and diversification. I will not take credit risks to try and earn a higher return.
o Major corpus is in a Dynamic Bond Fund. I am comfortable with the long-term risk/return of a dynamic bond fund as against fixed deposits. I do not invest in fixed deposits.
• Gold is through ETFs and Sovereign Gold Bond
• Market Timing – This is only to satisfy my urge of taking market calls. I restrict it to less than 10% of the portfolio.
o I use sector funds and/or ETFs for this purpose.
• Over the next 5 years, I plan to add 5% to Social venture investing and 5% to alternatives like REITs removing 5% each from Equities and debt, respectively.
2) Retirement Portfolio: Time Horizon – 20-25 years; Current Risk Tolerance – High
• The entire portfolio is in a Tier-I Corporate NPS (National Pension Scheme) in a 75% Equity and 25% Debt allocation. I’m using the tax break of upto 10% of basic salary to invest monthly in NPS.
3) Child’s Education Portfolio: Time Horizon – 10-15 years; Current Risk Tolerance – High
• Equity Mutual Funds – 95%; Gold- 5%
• Two equity funds – an equity fund of funds and one SIP thematic ESG Equity Fund
• Gold is through Gold Savings Fund.
These allocations are running in a disciplined manner since 2016 and only in about 2018 did I create an online portfolio tracker to be able to give me an overview at any point in time. All investments are directly made using existing websites or RIA investment platforms to keep costs as low as possible.
This is it. Simple and Easy to invest, track and review.
Learnings, Reactions, changes:
How did I react in March 2020?
My emergency corpus of 12 months expenses negated any worry on that front.
My equity portfolio across all the goals crashed. In the wealth and child portfolio, I made lumpsum investments. I also increased the SIP amount in those funds.
I didn’t need to make any changes to the Retirement Portfolio.
What am I doing to the portfolio currently?
The lumpsum investments made last year have appreciated quite a bit. I have booked profits and used the amount to pre-pay my home loan.
The retirement portfolio continues as is. No change to child education portfolio as well.
Market timing, worth it?
The market timing in the wealth portfolio for instance, in diversified equity funds, of course has good long-term benefit. However, it cannot come at the expense of regular, disciplined investment.
Some of the sectoral funds that I invested have done well, but I have realized that unlike a diversified fund, you can’t leave a sector fund alone. Just as you time your market entry, you need to a keep a trigger point for an exit. The trigger point is ofcourse returns. However, what should be the return target after which you exit the sector fund. Similarly, you also need a stop loss to exit a sector fund or a tactical investment that does not perform as expected. I think most of you will do well to avoid such complications.
So, just stick to your primary goals. Do it with as few investments as you can and let your basic investment plan run and do what it is supposed to.
These are only my examples and may not be suitable for others. I have only provided them as a general way to look at how to go about your investment and asset allocation plan. Also as I mentioned before, it has completely freed my mind from thinking about my personal investments.
The most important aspect is anybody can get this allocation going for themselves. Please note your situation and needs will not be the same as mine so adjust this as you deemed fit.
Please use the help of a financial planner or advisor. I would actually recommend you take financial planning advice.
For those who want to do it on their own, but are unable to decide on how to choose an equity fund or an asset allocation; mutual funds have fund of funds, multi-asset funds, asset allocation funds or solution funds to meet some or all of these goals.
Arvind Chari is the Chief Investment Officer (CIO) at Quantum Advisors, India. His 18 years of experience in investment management began in 2002 in macro, credit and fixed income portfolio management.
Over his career, he has gained a multi-asset exposure by helping launch the Gold ETF, Equity Fund of Funds and the Multi asset funds at Quantum Mutual Fund.
Arvind’s vast experience in managing money for global investors and his interactions with leading institutions has exposed him to a world of knowledge.
As a CIO, he is the thought leader at Quantum. Follow his insights on
https://www.qasl.com/insights/categories/india-macro
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