Asset allocation key to wealth generation

New Delhi: Right asset allocation among various asset classes is critical to long-term wealth management. In the mutual fund space, asset management companies (AMCs) have sought to achieve attractive long-term returns on their reserves through balanced asset allocation.

"On the principle of diversification, asset allocation surely helps in limiting risks and reducing volatility in returns. An effective asset allocation can be considered as one wherein appropriate allocation to the right asset class is made at a right time. This is because in a market cycle, at different points in time, different asset classes may tend to perform well," says Nimesh Shah, MD & CEO, ICICI Prudential AMC.

Among different classes, according to MFI Explorer, debt and hybrid funds have displayed steady growth ever since 2003. For example, CRISIL Short Term Bond Fund Index returns showed the growth of 6.7 per cent in 2018, while at the same time, the returns on S&P BSE Sensex was 5.1 per cent and on gold was 7.9 per cent, the MFI Explorer data showed.

"Comparing the returns in all these years from 2003 to 2018, the Sensex returns for investors oscillates from 72.9 per cent in 2003 to 5.1 per cent in 2018 and similarly, gold gave 19.4 per cent in 2003 to 7.9 per cent in 2018, while debt and hybrid returns remained steady from 5.4 per cent 6.7 per cent in all these years," it said.

So rotation of asset classes helps in maximizing returns. "If one were to look at the historical data of various asset classes, in terms of returns generated, one can come to a generic conclusion that winners (asset classes) have kept on rotating over the years. This is because various asset classes perform based on market cycle, which is different for each asset class," said Shah.

The equity market tends to perform well in expansionary economies whereas government securities generally perform well in contracting economies.

Research over time has proved that 91.5 per cent of the times asset allocation is the key determinant for portfolio performance followed by securities selection, which came in at 4.6 per cent.