Executive Courses, Financial Markets, General, Mutual Funds

Disciplined Investing

 

“History shows you don’t know what the future brings.”  – G. Richard. Wagoner Jr.

What’s worse than losing the money you invested? Throwing more money behind it, in the hope of recovering all the money.

As Warren Buffett says, “never test the strength of the current with both your feet”. Dividing your investments among different asset classes – stocks, bonds, gold, mutual funds and anything else as per your financial goals is known as asset allocation. It’s necessary to invest in multiple asset classes, in order to reduce our dependence on any one investment.

Why is asset allocation important?

Your asset/ investment prices could move in opposite or the same directions on any given day.It is difficult for seasoned investors and industry watchers to predict an asset’s value at any point of time. Therefore, it is important to invest in different assets in order to protect yourself from a sudden drop in investment value.

By investing in products having different risk profiles, you can insulate yourself from volatile market fluctuations, that could seriously hurt your net worth. This will minimize the risk of losing money and increase your chances of decent returns.

An investor may invest in different type of assets depending on the –

  1. Funds available
  2. Risk taking ability
  3. Financial objectives

A wonderful example of investment diversification/ asset allocation is that of Piramal Fund Management.

The Piramal Fund recently informed investors that they would extend the tenure of its Real Estate Management Fund by a year. The fund has a tenure of 6 years extendable by another 2 years.

Out of the 10 residential projects, it has fully recovered investments from 4 projects and are awaiting funds from 6 other projects. The reasons that were mentioned for this delay ranged from delays in government approvals to land acquisition and drop in land prices.

The extension was done to ensure that they recover all the funds invested and protect the fund from early claims of other fund investors.

The Piramal group has a wide range of business investments ranging from healthcare, life sciences, real estate and many more. This diverse platform enables them to build a portfolio strong enough to withstand any major market fluctuation in one of their asset allocated sectors. Therefore, any fluctuations in one segment allows them to rejig their investments in the market, thus protecting their total sum invested.

How does an investor decide his/ her asset allocation?

A thorough assessment has to be done before investing. Let’s say you’ve got a portfolio of Rs 1 Crore. You decide to invest 50% of this in mutual funds, 30% in gold and 20% to equity, .i.e. 50:30:20. Once the investments are done, you need to track this closely.

If you see a rise in the value of your mutual fund investments, but a drop in the price of stocks, the share allocation of your portfolio changes. Let’s assume it becomes 60:30:10, you need to rebalance or reinvest it in a way to protect yourself from losses.

This is because the value of your investments could fall at any time in the future and at that point the loses could be higher. Similarly, when the value of your allocation decreases significantly, you can switch asset classes in order to protect yourself from heavy losses.

Conclusion

The goal is to stick to the asset allocation plan. This will help you reduce the risk in your portfolio and pave way for smoother flow of income.

Reviewing your portfolio at least 2 times a quarter would be a healthy plan.

BSE Institute Limited’s Executive Program In Wealth Management gives an in depth knowledge of the current market investment scenario. It is most suitable for investors and fund managers looking to build large portfolios using a solid investment strategy.

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