Pay more heed to asset allocation and stock selection

Hundreds of options are available in the market for investment, but picking up the right investments can confuse even the seasoned investor. There are a number of products available in the market like stocks, bonds, mutual funds, private equity, structured products and so on, but the questions is – Where to invest? Which asset class? What will happen of my investments in future due to market volatility? What are the high and low points at which you can invest or book profits?

Everyone wishes to double their money the next day, but practically it is not possible. The best one can do is start investing in different asset class, which has ability to grow over a period of time with minimum risk. This technique to balance the risk and create diversification by dividing the assets in important categories is called asset allocation, thereby enjoying positive returns from each asset class over a period of time.

While we talk about investing, once should always start his investments in mutual funds. Investing in mutual funds is advisable and it has many advantages like high returns, experienced professionals, discipline investing, and diversification. Apart from this, the fund manager will take advantage of volatility in market and generate maximum returns for the investors. The two directions where the market can move are–upwards and downwards. If the market moves upside, the fund manager will book profit and allocate money towards other segments like debt or commodity fund. On the other hand, if the market corrects, then he will invest more money in equity markets as the stock are available at attractive valuations and strong business potential.

Talking about asset allocations in detail, many customers miss out on reinvestment opportunity that is available if you are receiving regular interest income on your investment or rental income for your house property. One can invest that monthly income in mutual funds through SIPs. This will help the customer to earn dual income for their investment. On one side, his principal is protected that earns a monthly income (Rs 1,000 per month) and on other side, that is the same monthly income (Rs 1,000 per month) is invested in equity MFs (SIP) in expectation to earn decent returns. Twenty years later, the equity MF portfolio he created by investing Rs 1,000 per month will be around Rs 13 lakh. The customer is in win-win-win situation because (a) Principal amount is protected (b) Regular inflow of monthly income (c) Decent MF portfolio (d) Capital appreciation in case of property (e) Taking advantages of both the market – equity and debt.

A recent study also says that, investor who undertook stock selection and market timing for investment selection were benefitted by only 5% and 2% respectively whereas asset allocation alleviated to 93%. The main difference between the greedy return hungry investor and successful investor is the ability to weigh the difference between risk and return.

Asset Allocation will help you hedge your portfolio when in need, provided you are rebalancing your portfolio annually. There is a thin line between following the asset allocation and market trend. The latter looks bright but are never either consistent performer or say lasts longer. Therefore it is better to start following asset allocation today than repent later.

ALLOT YOUR PICK

• Asset allocation will help you hedge your portfolio when in need
   
• Have the ability to weigh the difference between risk and return

The writer is head products - preferred services, Anand Rathi Shares & Stock Brokers Ltd