Where is MY Asset Allocation?

Asset-Allocation-640x300

According to a famous Buddhist parable, Once upon a time, six blind men encountered an elephant for the first time. All of them went where the elephant was. Every one of them touched the elephant and came out with different version of what it was right from; it’s a pillar, rope, and branch of tree, hand fan, and wall to pipe.

They began to argue about the elephant and every one of them insisted that he was right.

A wise man was passing by and he saw this and on understanding the situation calmly explained to them, “All of you are right. The reason every one of you is telling it differently because each one of you touched the different part of the elephant. So, actually the elephant has all those features what you all said.”

Asset Allocation is a single body with different parts, unequal, some bigger than the other, some working better or playing a larger role than the other, however a single body nevertheless.

 

So Where is the Challenge

Let me explain:

Here is a look at Retail (as categorized by Association of Mutual Funds in India) asset allocation in India:

 

Asset Class Liquid Funds Gilt Debt-Oriented Equity + Balanced Total
AuM(INR Cr.) 12,436 800 71658 474,901 559,794
% Of Total Retail Assets 18%** 82%  

**Debt portion of balanced funds added here

Clearly there is no asset allocation through mutual funds unless everyone is too aggressive which doesn’t quite add up to the overall risk-averse profile of most Indians.

Of-course the defense would be that Indian investors invest majority assets conservatively into Bank Fixed deposits and bonds (INR 43 L Crores); insurance (INR 33.3 Lakh Crores); pension funds (INR 6 Lakh Crores); Cash (INR 17.5 Lakh Crores) Provident Fund (INR 14 Lakh Crores); Small Savings (INR 7.3 Lakh Crores).

Direct equities (INR 49 Lakh Crores including promoter stake);

If you add all of the above and compare with equities as a proportion of total, it’s still a ratio of 30:70 equity: debt.

Clearly there is a skew in favor of debt

So where is the Asset Allocation?

Equities on discounting promoter stakes is clearly an under-represented asset-classes and do not seem to have the influence to hurt investors’ wealth negatively;

Even if equities fall by 50% (a “Black Swan event) and the above mentioned non-equity asset class delivery even 5% return-investor portfolio would still be at 87%, which cannot be termed disastrous

Why are investors are not following Asset Allocation?

Advisors, Asset Managers, salesmen often are seen complaining about lack of discipline among investors towards their “Asset Allocation”

There is a planning, communication, and understanding gap between the various stakeholders

Now go back to the Elephant-remember it’s a body and that’s the way the advisor/investor needs to be able to see it and not as mere parts

Challenge however arises in the way equity investments happen in India; just take the case of mutual funds-40% of retail equity assets have life less than 12-months as on Sept-2018.

This period starts in 2017 when markets were booming and everyone had a sense of

“NOTHING CAN GO WRONG FROM HERE”; “THIS IS A COMPLETELY NEW ENVIRONMENT”;

As we all know-that’s the immediate moment when the seeds of “RISK” are sown;

These are the times when host of new investors come in and older ones are sold highly complex ideas to increase allocations.

Anything can give under such circumstances (a regulatory change-introduction of capital gains on equities; a big companies up/down returns etc.,) leading to risk-on environment and portfolio losses.

 

Do You Exercise only your Biceps?

Imagine if you only exercise one part o your body what would happen

It will look disproportionate; attract all the attention and if you don’t exercise for a day-will make you feel inadequate;

Great emphasis on one asset-class at the cost of others;

Looking at only the part and not the body

Will cause great grief if that one part doesn’t work out the way fantasized

 

What to Do?

Understand “RISK”-A common perception is that “High Risk Translates to High Returns”;

It doesn’t work that way, on the contrary-

“A high risk category is not worth it unless it justifies the risk through the returns”

This change of definition can help the investor and advisor do the right thinking before taking up any investment:

 

Look at your over-all portfolio and determine your Risk

Ideally share your entire portfolio with your advisor so that you continue get a wholesome advice and not piecemeal

Remember “RISK” can be managed only when known and unless your advisor has your entire history

Their advice will be like a Band-Aid

____________________________________________________________

 

2 thoughts on “Where is MY Asset Allocation?

  1. Dear ManishYour article on Asset Allocation is superb-It gives a layman insights into Asset Allocation and errors made during this most important process-Heartiest Congratulations and Look forward to your next post

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s