Navneet Dubey Moneycontrol News
Building a portfolio is like playing long innings in test cricket. You need to apply an asset allocation strategy over a long term period, which needs to be restructured from time to time as per your increasing age through financial planning approach.
Himanshu Kohli, co-founder, Client Associates said that strategic asset allocation contributes more than 90% towards the success of any portfolio while market timing or security selection contributes less than 10% towards the success of the portfolio. “Unfortunately investors spend more than 90% of their energies in market timing/stock selection and forget to focus on asset allocation which gives the big picture that could help draw a plan which can meet their life goals,” he said.
Hence it is extremely important to arrive at an appropriate asset allocation for an investor. Many experts advocate that 100 minus your age should be the allocation towards equity or growth and balance could be debt/preservation portfolio. However, this formula may not work in each and every case. The ideal way to arrive at an asset allocation while building an investment portfolio is to draw a holistic financial plan which can be divided into 4 sections:
Liabilities
Understand your liabilities, arrive at the overall needs which one has, quantify these needs as of today’s value which gives a sense of how much wealth is required to be financially independent. You should also ensure that you have adequate insurance to back those liabilities, this will help you in securing your investments from any mishaps that may occur in future.
Assets
Assets are described in financial planning as your holdings which can help you make wealth over a long time period. The more assets you have and the lesser the liabilities, the greater will be your net worth. So, you should keep on increasing your physical and financial asset as required in your financial plan.
“Make a complete inventory of existing wealth i.e. investments into financial assets like PF, PPF, fixed income, equities and also take a stock of physical assets like properties (excluding home which is a personal usage asset) and gold (excluding jewellery used by the family),” said Kohli.
Cash Flows
Liquidity is always needed and at every point in time ready cash should always be available with you even while restructuring your asset allocation during markets up and down. Through financial planning, you can draw the cash flows over the lifespan to arrive at the liquidity needs at different time horizons i.e. liquidity should be available as and when the need arises.
Risk Profile
This looks at the behaviour/ reaction of the investor which gives an idea about the risk appetite of an individual investor. It is not always equal for every men/woman to take an equal risk at a given point in time and at the same age. You need to assess your risk taking capacity while making investments in any of the market linked financial product. You should always take a risk profiling check before you make any investment.
Conclusion
Thus, through asset allocation strategy applying proper financial planning approach, it becomes easy for investors to make their investments in the right direction by understanding their liabilities, assessing their risk profiling and then choosing funds to go ahead with making an investment for long term as per the desired financial goal.
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