Every Investor and Advisor is focused on trying to achieve consistently above average returns by investing in the BEST Asset Class. No Single Asset Class consistently beats all other asset classes at all points of time. Assets have their own way of behaving and tend to perform at variance. Still, every investor worth his salt is on the hunt for the Best Performing Asset Class which will give him Above Average returns.
After seeing secular Bull Run in Sensex in 2006-2007, he invests in Mutual Funds only to see the Market crash by a massive 52%. Crestfallen, he moves to Gold after its spectacular run in 2009-2010, only to see Gold giving a return of less than even Fixed Deposit in 2012.
Once bitten twice shy, he sees the Sensex run up before Elections and post elections with apprehension and is unsure of what to do. As seen from the past data, in 2008, when Equity crashed by a massive 52%, Gold gave a positive return of above 25%.
But in 2012, Sensex gave a return of 27.5% whereas Gold gave a return less than Fixed Deposits! And as we all know, for the past 2 years, Sensex has hugely outperformed both Gold and Fixed Deposits by a wide margin.
At different points of time, different assets have outperformed. If you see the above data, at some point, Gold investors would have made more money, at other points, investors in Debt funds would have been richer and at some point equity investors would have looked smarter.
Now, I am sure everyone would want to be an investor who has made smart moves at all points of time. This is next to impossible.
What is possible is however, making above average money in all types of markets over a longer period of time on a consistent basis.
HOW TO ACHIEVE THIS?
Simply by Asset Allocation!
Different assets perform differently and invariably some asset will tend to outperform the other and thus gives cushion and boost to your overall portfolio returns. Every investors dream is to create Alpha Returns and on a consistent basis.
Why investors, even Advisors are always trying to do the same. But, true financial advisors know that this is next to impossible and thus try to achieve consistently above average returns which beat Inflation with a wide margin so as to ensure that you create a Mega Wealth.
Just because Gold or Equity has given super normal returns does not mean that you should put all your money in that asset. Chasing "HOT" asset could give you ultra high returns but also carries great risk and could cause severe dent to your portfolio in case of a sharp fall.
This would not only expose your portfolio to the risk of that asset but also affect your diversification and in turn leave your portfolio venerable to high volatility. A concentrated portfolio may give you Alpha returns but also carries greater risk.
Thus an Asset Allocation Fund will ensue that you are not exposed to any one asset.
Innumerable past data analysis has proved that efficient Asset Allocation is what results in 90% of your gains and only 10% is due to choice of stocks/funds. Your portfolio performance does not depend on market timing, unlike what is commonly believed.
HOW DOES ASSET ALLOCATION GIVE YOU CONSISTENT ABOVE AVERAGE RETURNS?
Let us take an example:
In the above example, the returns of 2012 is taken, the Sensex had gained over 25 per cent, compared to 12.95 per cent in gold and Liquid Fund at 9%.
Now, what happens when you bring all the Asset class allocation to the original levels is that you are "Booking Profit at high Levels and buying cheap at lower levels" which is actually 'Timing the Market' in different words.
Past history has shown that 2 out of 3 assets have been consistently out performers and hence you ALWAYS make money in a Multi Asset Fund. A True Portfolio should consist of a judicious mix of Equity, Gold, Debt (FDs, Liquid funds, etc) and Real Estate.
Doing this on your own requires not only good knowledge of various markets but also involve huge cost of transaction, not to forget the taxation issue. Also, are you sure you are disciplined enough to do this regularly without getting carried away with the attraction of any asset class?
The best option would be to do this through Mutual Funds by going for Asset Allocation Funds with the help of your Financial Advisor. The Financial Advisor will also eliminate the "bias" that you may have towards certain Asset Class. The Financial Advisor will also enable you to zero in on the right Percentage of Asset Allocation.
ANY NEGATIVES ?
The one negative in Asset Allocation Fund is that these Funds are taxed as Debt Funds and you will be paying taxes even if you stay invested for more than 1 year. Short-term capital gains are taxed according to the investor's tax slab while long-term capital gains tax is 10 per cent without indexation and 20 per cent with indexation.
Do note that the name Asset Allocation could be a misnomer. Some Funds just move assets between Large Cap, Mid Cap and Small Cap and call them Asset Allocation funds! Some funds are slightly better that they move between Equity and Debt, but for me they are not Asset Allocation Fund but Balanced Funds or MIPs.
For me, the true Asset Allocation Fund is the one which moves between Gold, Debt and Equity. There are mutual funds like the Axis Triple Advantage Fund, Taurus MIP Advantage Fund, Canara Robecco Indigo Fund which do this gymnastics on your behalf sparing you the difficult decision of moving your assets.
Take the Advise of a Financial Advisor before going for Asset Allocation. There is no hard and fast rule that you should have a fixed percentage of money in each asset class.
Each individual will require different percentage of Asset Allocation depending on his/her goal, risk appetite, cash flows, investment horizon, etc.
Also, be warned, that a Diversified Multi Cap Equity Fund has the capacity to outperform Multi Asset Funds especially in strong bull markets as is expected to happen in India going forward.