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Asset Class Rotation key to Diversification

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Investors are on a spare tyre given the way financial markets have behaved post 2008 crises. Think of a bumpy car ride to an uncertain destination that has used up all the spare tyres, that's how investors have gone through in the last few years. But as Benjamin Franklin said, "To succeed, jump as quickly at opportunities as you do to conclusion", it is in these volatile times that the need for structured approach towards financial planning guided by active allocation matching your risk profile is the key to long term superior returns.


Devising an asset allocation plan is crucial to achieve one's financial goals. Protection against significant losses and enhancing portfolio returns with muted volatility are key objectives of asset allocation. Asset classes perform differently across different time frames


Hence active asset allocation is the optimal way to maximise your returns while reducing risk too. Equities are one of the most risky and volatile asset classes. Diversification is of utmost importance in equity since there are more subsets in equity asset class like sectors, themes, capitalisation, etc. Different sectors or themes perform diversely in different phases. For example, infrastructure boom was from 2005 to 2007 while post the Lehman Brothers crash in 2008 and the subsequent crisis, there was a rally in the domestic consumption theme in India. Similarly, midcaps led the rally in Indian equity markets from 2004 to 2008. Hence, investing through the approach of active asset class allocation will enhance your rewards. Table 2 explains how diversification helps giving better risk-adjusted performance.


Mutual funds are best placed to perform this function in your portfolio as they are inherently built to invest across sectors and market capitalisation. To sum it up choose the right asset mix through a well-diversified plan and leave the job in the hand of professional institutions and also don't forget to periodically review your portfolio.

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