Asset Allocation – Use this Key Approach to help create wealth

We have often heard that since each asset class has a specific role to play in your portfolio, it is wiser to allocate your money across different asset classes.

But, why is this emphasized?

We can understand this through a small story:

Recently, various geopolitical risks have disrupted supply chains across the globe, which has led to a slowdown in economic growth. This has impacted equity markets, leading them to be volatile in nature. Amidst this volatility, there are 3 investors who are assessing their ability to invest in the equity markets:

Though the risk appetite is different for the 3 investors, a noteworthy objective of investing, apart from creating wealth in the long term, is to beat inflation in order to keep up with the increasing costs. Keeping that in mind, which of the 3 investment approaches could be the most ideal?

• Shikhar’s Investment Approach: Investing purely in equities could be a solution, but it could prove to be a challenge, especially during periods – like the one stated in the story above – when equity markets are volatile in nature
• Siddharth’s Investment Approach: Investing purely in debt, whilst stable, would not be effective at beating inflation and creating wealth in the long term
• Aditya’s Investment Approach: Investing in different asset classes could be the most ideal approach because firstly, the presence of equity could provide growth to the portfolio and helps in beating inflation if invested for long term. Secondly, presence of debt and gold can help in lowering the drawdown of the portfolio when equity markets are uncertain

The above example is for illustration purpose only

Impact of Asset Allocation during a downturn Equity Markets – An Example

If all the 3 investors were invested during COVID-19 between the peak in January 2020 and trough in March 2020, the following would have been the impact on their respective portfolios:

From the table above, it can be understood that if you had invested across equity, debt and gold, your portfolio would have seen a less negative returns versus pure equity during that period. The reason behind the same – as discussed above – is that despite allocating towards equity, your exposure towards risk would have been reduced as a result of debt and gold being part of your portfolio.

This is a key attribute of “asset allocation”. As a matter of fact, we can see from the table below that you can reduce your exposure to volatility by combining negatively-correlated asset classes. This helps in bringing “diversification” to your portfolio.

What should you do?

An octave, also known as Saptak in Hindustani Classical Music, comprises of the following 7 notes – Sa Re Ga Ma Pa Dha Ni. Interestingly, every song is created using a combination of these 7 notes. By judiciously combining these notes, a composer makes listening to music a stress-free experience.

Just like this combination equates to a stress-free experience, creating an ideal asset allocation mix helps in making an investor’s investment journey less stressful!

One such fund – HDFC Asset Allocator Fund of Funds invests in units of equity-oriented schemes, debt-oriented schemes, and gold ETF. Since its inception on May 05, 2021, the Fund has followed a model-driven approach that has helped to dynamically manage allocations across different asset classes (To know more, visit Product Page).

You could consider investing in this product, or consult your financial advisor today itself to arrive at your ideal asset allocation mix!

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.