THE MIDDLE GROUND

Mutual fund categories offering a balanced approach to investing are ideal for optimal asset allocation

In both finance and life, making effective decisions during difficult times is of paramount importance. Currently, the Indian equity markets are performing exceptionally well, with positive indicators such as a healthy current account deficit, fiscal deficit, inflation, and other macro-parameters. Over the past six months, foreign portfolio investors (FPIs) have been investing heavily in the market, resulting in significant inflows into equity funds.

Given the favourable market conditions, investors who entered equities in 2020 might have achieved substantial returns. Similarly, those who invested in small and mid-cap funds three years ago could have enjoyed average returns of 27% to 30%.

During a bullish market environment like this, it is important for investors to remain vigilant and focus on asset allocation. Asset allocation involves dividing one’s investment portfolio into specific percentages among different asset classes, such as stocks, fixed income, commodities, and more. This practice helps optimize the risk-reward ratio of the portfolio based on the investor’s risk tolerance and return expectations.

For instance, conservative investors may allocate a larger portion of their portfolio to debt products to safeguard their investments during periods of market volatility. However, during strong market rallies, they may have to compromise on potential returns.

On the other hand, some investors may be overly aggressive or too conservative in their investment decisions, resulting in suboptimal returns.

Investor asset allocation should be periodically reviewed and adjusted for various reasons, including changes in investment values, additional investments, redemptions, and other factors. Regularly rebalancing the portfolio helps maintain the desired asset allocation.