The Role of Asset Allocation in Investing

A proper mix of asset allocation that aligns with investor's goals is key to the portfolio's long-term performance and reaching milestones.

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AMIT MARATHE

Co-Founder, Wise Turtle LLP

India's large-cap stock index has doubled in the past 4 years. The EPS (earnings per share) has also gone up in tandem. Supported by lower leverage and improved earnings growth, the mid and small-cap indices have also rallied in "fast and furious" mode over the past 12 months.

In addition to earnings growth, the gush of continuous domestic liquidity, stable macros, political stability, government capex, better and improved performance of public sector companies, continuity of policies and reforms has led to a strong bull run in the Indian equity markets.

However, after a 4-year dream run, some segments of the market have become over heated. It is pertinent to pay attention to the below quote on risk given the pace of the rally.

"Actual risk is highest when the perception of risk is lowest and vice versa" As the markets reach new all-time highs, it is crucial for investors to reassess their current asset allocation. In most investment portfolio's the percentage of equity allocation has gone up. This can be attributed to both return contribution as well as fresh inflows which tend to follow asset classes with the best returns. The markets tend to suck in all excess liquidity during good times.

The Role of Asset Allocation in Investing

Asset allocation is more than just a buzzword in the world of investing. It is a key strategy that determines the long-term performance of an investment portfolio. While market timing and fund/security selection are often highlighted as drivers of success, the reality is that asset allocation plays a far more crucial role in achieving financial goals and mitigating portfolio volatility.

Role of different asset classes in Investments: