How 2020 Taught Us The Importance of Asset Allocation

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2020 is coming to an end. However, is it the end of all the uncertainties that came with it? Covid-19 caused a financial market meltdown. The Index and other asset classes experienced multiple ups, downs throughout the year. Many of us around the globe suffered financial problems. The financial health of investors took a big hit. The most affected investors were those who did not consider the importance of diversification and asset allocation.

What is Asset Allocation?

Asset allocation is simply the process of allocating your assets in the correct proportions between equities and debt, bonds, or gold. This will maximize your chances of reaching your financial goals, while also controlling investment risk.

Don’t worry. It’s never too late.

You might want to review your portfolio allocation according to your risk appetite. Ask these questions to help you decide on an asset allocation strategy.

1. Are my investments focusing on one asset type?

Your financial goals could be hindered if you invest in one asset class. Strategically diversifying assets across asset types will reduce the risk of bad outcomes. You can eliminate the need for you to forecast the future financial markets by rebalancing your portfolio. This reduces dependence on one asset class to produce returns.

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Allocating money across asset classes will reduce the chance of a bad outcome.

Liquid mutual funds are a good option to keep in your portfolio. This liquid fund can be used to provide short-term cash and contingency funds, and may also help you earn slightly higher returns than savings bank accounts. This allows you to have Equity and commodities such as Gold in your portfolio. Diversifying your investments can help you reduce dependence on one asset class and generate risk adjusted returns. This creates new dimensions to the market that are not perfectly correlated and will respond differently to changing economic conditions. While diversifying your portfolio can reduce downside risk, it can also help you grow your portfolio.

2. Is it a good addition to my portfolio?

Asset classes don’t all move in the same way or at the same speed. That’s why it’s important to have the right mix.

Stock markets have had their ups and downs over the years. There have been times when debt was regarded as one of the most reliable assets. Sometimes it has been Gold that shines the most. If equities are experiencing a correction, having other asset classes in your portfolio can help you earn net positive returns. This chart illustrates how important it is to include Gold in your portfolio to diversify risk.

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3. Is it in line with my risk profile?

To build a profitable investment portfolio, you must focus on the risks you can control (inflation), and minimize the risks you cannot (market risk). We tend to focus on the things we can’t control (Market risk, Time and Emotions), while rarely focusing on the factors we can control (Inflation and Investment Tenure and Actions).

It is recommended to allocate some assets to equities even in the most conservative portfolio to protect your portfolio against inflation risks.

4. Is the asset mix likely to help me achieve my goals?

To determine your asset mix relative to your investment goals, the first step is to consider whether your portfolio can meet your goals. This exercise will require you to carefully consider your investment horizon.

In most cases, the old rule of subtraction from 100 works well.

This chart is only for illustration purposes.

Quantum recommends that you look into an Asset Allocation Plan. This plan has the potential to help your reach your financial goals. The 24-80-20** Portfolio is easy and straightforward.

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a. Your safe money for 24 Months:

You should have enough money to keep up with your consumption patterns, which is best around 24-36 months.

Quantum Liquid Fund is one such option. This fund prioritizes safety and liquidity over returns. Continue reading

b. Future planning with “80-20”.

You only need to invest 80% in equity mutual fund and the remaining 20% in Gold.

Quantum recommends an equity portfolio consisting of three funds.

70% in Quantum Equity Fund of Funds

We offer a ready-made equity portfolio, backed by more than 400 equity funds.

20% in Quantum Long Term Equity Value Fund, (QLTEVF).

This plan follows the value investing strategy and offers the possibility to build wealth over time

Quantum India ESG Equity Fund: 10%

Final 20% of gold allocation – Quantum Gold Saving Fund

It is no surprise that gold has been a reliable portfolio diversifier in recent times.

Investing 15-20% in gold via Quantum Gold Savings Fund makes sense. Continue reading

5. Are these assets relevant for emerging themes?

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Global ESG and Gold funds have seen a breakthrough in 2020.

To maximize the benefits of market cycles, take advantage of new investment trends.

These are the key takeaways:

  1. Your financial goals could be hindered if you invest in only one asset class.
  2. Asset classes do not move in the same way or at the same speed. That’s why it is important to have the right mix.
  3. To build a profitable investment portfolio, you must eliminate inflation risk (inflation risk) and reduce market risk (market risk).
  4. Your chances of reaching your financial goals will increase if you tailor your asset allocation to suit your investment tenure.
  5. To maximize the benefits of market cycles, take advantage of new investment trends.

Conclusion

Markets can fluctuate by their very nature. They can fall or rise like a Phoenix at any moment. Avoid taking short-term measures that could harm your long-term investments. Keep your investments safe for the long-term. Keep your SIP going until you reach your financial goals. You can spread your investments across different asset classes. You can invest your money in different assets, such as equity, debt, or gold and watch your investments grow over time.

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