Asset Allocation for Individual Investors


Contributed by: Meera Siva

Chennai chapter of the IAIP conducted a speaker event on the topic of asset allocation on October 10.  In this interactive session, members and candidates got insights on various trade-offs when allocating assets in retail investor portfolios. The speaker, P V Subramanyam is a financial trainer, investment consultant and a savvy investor. His career spans three decades in the financial services industry – from equity broking, mutual fund advising, corporate finance advising to personal financial planning, He has conducted over 50 training sessions on finance for corporate clients in diverse sectors including manufacturing, BPOs, NBFCs, mutual funds, life insurance, banks and brokerages.



He is a regular contributor to well known financial websites including moneycontrol, myiris and publications such as Economic Times and Financial Express. He has authored ‘Retire Rich Invest Rs. 40 a day’ – a book on wealth creation which has sold over 50,000 copies.  He has also written a book for doctors – ‘Wealth Prescription for Doctors’. PVS is a Chartered Accountant. He is a fitness enthusiast and is a regular participant in the marathons.

Highlights of the event

To arrive at optimal asset allocation, one must first answer the question “what is the purpose of asset allocation”. The answer to this is rather simple –to meet the investor’s stated financial goals. The allocation should aim to increase returns while reducing risks. Your asset allocation should meet your goals while allowing you to sleep peacefully.

Protecting wealth

To start with, you create wealth not by allocation, but by taking concentrated bets. Take the case of business owners such as Bill Gates, Azim Premji or Warren Buffett. They did not get rich by diversifying their investment; rather their wealth was focused on their business. Note that while non-diversification worked for them, millions of other entrepreneurs have failed to build wealth. There is a great survivorship bias in wealth building, so you have to be watchful of that. Once you have wealth, allocation helps to protect it.   

Forget thumb rules

One rule to remember is that “thumb” rules such as “equity allocation must be 100-age” are not very helpful. Keep in mind that the thumb does not look like the other fingers! Take the case of allocating assets for an 86 year old. While low equity is what theory may recommend, in reality we have to consider his net-worth. If the corpus is Rs 50 crore and there is no need to bequeath any asset, even a 95 per cent allocation to equity may not be an issue. An ideal allocation should not keep the investor awake at night. And whatever be the allocation, the advisor must get the objectives in writing when dealing with retail investors to minimize ‘blames’.

Asset allocation works only when the expected returns in the asset classes are near each other – say 12% and 8%; but if the returns are divergent, say 20% and 8%, you can stay a little longer in the bigger yield fund and thus compensate for your mistakes.

Include all assets

Consider the case of finding the best allocation for a 45 year old person with a small corpus. We tend to ignore the investor’s largest asset – the present value of his future earnings or human capital. If the person is a professor at IIT, the asset is debt-like and one can allocate more to equity. For someone working at Yahoo!, the asset may look more equity like. No matter what, this large asset must also be protected by taking term insurance.

Tax arbitrage

Allocation must consider tax angle to increase returns. For example, schemes where tax is deferred until the money is withdrawn tend to offer better returns, especially over a long term. So you must look for such tax arbitrage when picking where to invest. Another advantage is that if tax is paid post retirement instead of during the peak earning years, your tax bracket may also be lower, reducing tax.

Role of equity

Equity is the asset class that has the potential to give high returns over the long term. However given the opaque nature of many businesses in India, you have to be careful in picking stocks. Often you may have a good product – example GMR’s airports – but a lacklustre stock. Or ITC that sells cigarettes, but the stock offers good returns. You also have to diversify within equity as it is not homogeneous. Choose between large-,mid- and small-cap stocks, public sector and private companies as well as sector exposures. And if one wants certain exposure to equity and some to debt, it is cost and tax effective from rebalancing perspective to go with a balanced fund rather than an equity-only and debt-only fund.

– MS

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