Even those who prefer debt for its safety are looking at more options
It is not often that you find more than a couple of asset classes producing good returns at the same time. Invariably, assets such as gold and equity don't perform in tandem, and hence it was easier to allocate to them in line with the risk profile of the investors. In the last couple of quarters, however, more than one asset has turned attractive - gold, debt and equity. In line with the trend, you even have monthly income plans with a combination of more than two assets.
In the past, those who stuck to debt were a different class of investors who didn't wish to take risk with their money. The changing lifecycles and the growing integration of investment markets across the globe have pushed even individual investors to embrace the concept of asset allocation. Hence, you have individuals who were using debt to park profits being prepared to take advantage of other assets.
For instance, when the indices (Sensex) touched a level of 20,000, it made many look at the option of profit-booking a few weeks ago. In fact, the domestic mutual funds have been sellers at every rally and have been in cash during a good part of 2010. Should individual investors too follow a similar strategy has been the question many ask. Such a strategy has challenges of implementation as once too often, history has proved that timing the market is always a challenging exercise. Then, should you focus on asset allocation or profit booking at regular intervals? Both have their advantages and disadvantages and hence take a call according to your comfort.
Profit-booking regularly
The biggest advantage of this strategy is that it gives comfort to the investor that he has made his money. However, you should define a limit or percentage for this strategy rather than worry about the market trend. The downside is that the notional profits may be far higher than the actual profits during an uptrend in the market or you may end up waiting for a longer period of time in a bearish market.
On the contrary, the asset allocation strategy ensures better risk management as the risk profile of one product differs from another. Of course, the basic requirement of an asset allocation strategy demands choice of different class of assets. For instance, mutual funds and direct stocks cannot be construed to be different assets since both focus on the same asset though the methodology of investing may be different.
Besides allocation, the strategy would be effective only when the allocation is reviewed on a regular basis. Due to differences in performance cycles of different assets, a pre-determined allocation percentage can go haywire over a period of time and hence you need to monitor the allocation accordingly. An annual review would be one of the options as it also gives enough time for you to do a thorough analysis. More importantly, it gives the much-needed liquidity and also allows you to take advantage of different market cycles.
For those who find the entire process tedious, mutual funds and insurance companies themselves have built in the tools. The strategy is executed through trigger based portfolio allocation. They ensure a passive investment strategy without much bother.
