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What is your asset allocation strategy?
Indian investors have historically invested largely in fixed income, physical gold and real estate
Not too long ago, India was slated as one among the `Fragile Five.' Today, it's the cynosure of all investors, attracting foreign and domestic funds alike with risk taking rising in India's capital markets. As investors gain confidence about the future, they hold on to a belief that nothing can't go wrong and get embroiled in a bubble of complacency, ignoring their real risk appetite. They end up making poor decisions. It is important for investors to have a financial plan to drive l investment decisions. Asset allocation, simply stated, is an investment strategy seeking to create a balance between one's risk and reward by apportioning an individual's investable surplus, taking into consideration the investor's goals, risk tolerance and investment horizon.
One key lesson the financial crisis taught investors is that the liquidity of a portfolio should be a key decision driver. Portfolios that can be liquidated at short notice have advantages. Firstly, it can limit losses in an asset class where prices are tumbling. If one can generate cash when prices are falling, there may be buying opportunities as assets could be available at fire sale prices. Be fearful when others are greedy and be greedy when others are fearful, as a notable investor once said.
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Wealth managers tend to advise investors to look at a three-year investment horizon as equities can be highly volatile in the short term.
Asset classes can be broadly classified into equities, fixed income, gold, real estate, private equity, commodities and currencies. Given the amount of investable surplus retail and affluent investors have, most of their money is invested in equities and fixed income. Investment in real estate, private equity, currencies and commodities is the preserve of the high net worth and super affluent seeking higher returns from alternative investments. Still, experience has been rather mixed with many such investments tending to be illiquid with a struggle for exits and sub-par returns that do not justify their high fees. Indian investors have historically invested largely into fixed income, physical gold and real estate. While these asset classes have done well in their own way, given high inflation and stretched valuations in real estate, investors are expected to move into financial assets from physical
For fixed income, investors should invest across the spectrum in terms of tenor. Shorter tenors will help realise high current yields and medium-to-longer tenors will help drive returns through mark-to-market gains as and when rates start to move lower. Ultra high net worth investors have consistently used available liquidity to invest in physical assets, particularly land and residential real estate. While there is limited or no yield from these assets, investors have seen significant capital value appreciation. As a result of pent-up demand from these investors, real estate values in many of our cities have increased manifold. It will be interesting to see whether the frenzy to invest into real estate continues given that many assets are now quoting at relatively high values.
Lastly, all investors should diversify their portfolios and consider investing outside of India as a core part of their portfolio to help diversify savings into different geographies and currencies.
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