AFTER A SOLID run for the better part of the previous two years, equity markets have been on corrective mode from September 2024 onwards. A combination of FPI selling, weak corporate results, trade tariff fears from the US and a slowing economic growth played were all at play.
On the other hand, gold prices have experienced a healthy upward move in the last few years, while fixed income returns have been steady.
At all times and more so during dynamic market and economic phases such the one we are experiencing now, managing portfolio volatility and generating risk-adjusted returns become critical to reach our financial goals.
In this regard, asset allocation – deploying money across equities, fixed income instruments and commodities (gold, etc.) – becomes the all-important process to be followed in our investment journey for us to achieve the above ends.
A study done by three finance experts as far back as in 1991 makes it clear that 91.5 per cent of a portfolio’s performance is determined by asset allocation, with security selection, market timing etc. being less significant.
Allocation is the key
Various asset classes move according to their own individual market cycles. The outperformer keeps rotating over the years.
Equities are meant to provide the growth ingredient to your portfolio. They tend to do well when the economy and corporates are in an expansionary phase. But they can be volatile.
Debt instruments tend to do well during weak economic phases. They are intended to provide stable returns and steady cashflows to the portfolio via interest/coupon payments.
Gold is meant to be an inflation hedge over the long term. It is also a beneficiary of currency depreciation against the dollar. The yellow metal generates strong returns in some phases, but can also correct sharply at times.
Over 20 financial years―FY05 to FY24―the Nifty 50 TRI was the best performer in 12 years. Gold (world gold council prices) and debt (Nifty Composite Debt index) were up for seven years and one year respectively.
It may not be possible to predict the winner in each cycle. Therefore, remaining invested across asset classes suitably (after consulting your financial advisor) in all market cycles becomes very important to generate risk-adjusted returns.
Equities have negative correlation with gold and low correlation with debt. So, their movements are not dependent on each other. Gold and debt have extremely low correlation.
When we mix assets with negative or low correlation, portfolio diversification is healthy.
Mixing asset classes smartly
Allocating to specific assets and more so executing the ‘buy low, sell high’ diktat for the equities part seem easy at first sight. However, these are complicated tasks where timing is extremely difficult and investor behaviour during various market levels complicates matters.
In September 2024, October 2021, September 2018 and September 2017, when markets were expensive (on metrics such as PE, PB, market cap to GDP), DII flows were extremely robust. And in September 2013, September 2012, January 2013 and March 2014, when markets traded at low multiples, DIIs flows were negative.
So, investors end up doing the opposite of what is required in specific market conditions.
That’s where executing asset allocation via mutual funds is a smart mode of investing for retail investors. One such fund is the ICICI Prudential Asset Allocator Fund (FOF). This fund dynamically allocates investments across equity, debt, and gold mutual fund schemes/ETFs using an in-house valuation model.
By investing in such a fund investors gain several advantages.
Simplified diversification: Access multiple asset classes through a single fund, eliminating the need to manage separate investments.
Expert-driven allocation: The fund manager determines the asset allocation pattern using robust internal models, ensuring it aligns with prevailing market conditions.
Since the fund dynamically adjusts allocations, investors can invest without worrying about market entry timing.
The writer is managing partner, Mangal Deep Financial Services