Sandeep Jethwani, Managing Partner, IIFL Investment Managers on asset allocation strategy for an HNI
Why bother with asset allocation at all? Studies across time periods and markets have shown that 85-90 percent of returns can be attributed to asset allocation, and not to choice of instruments. Since equities tend to be volatile, one needs to invest in a diversified mix of asset classes. Assuming that a mass affluent or HNI individual already has exposure to real estate (self-owned house) and gold (through jewellery), a healthy financial portfolio can be built using a mix of equities and debt in alignment with the investor's risk profile. For individuals working towards building a retirement corpus, we need to keep in mind the residual income earning life and risk tolerance. Accordingly, we have given the asset allocation for two individuals who have 15 and 25 years of work life ahead of them. In both cases, they are assumed to be well-insured, with no immediate lump sum liabilities to address (see table for asset allocation). Since individuals may not have the time and expertise to keep altering their allocation to mid and small-cap funds, which tend to be highly volatile, they should stick to a mix of large-cap and multi-cap funds within their equity allocation. Deployment of target equity allocation should be done in 12-18 equal monthly tranches via a systematic investment plan. When investing in debt funds, stick to funds having high credit quality and low to moderate duration. Deployment can be done upfront.