How Asset Allocation Improves Returns while Reducing Risk | 5 Asset Allocation Portfolio Strategies
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Having the right asset allocation portfolio can earn you higher returns and that too while reducing the risk in your portfolio. Asset allocation is a tried and tested way of achieving long-term financial goals and requires dividing one's investment portfolio amongst different asset categories like stocks, bonds, gold, real estate, cash etc.
In this video, I shall cover the basics of asset allocation, its importance and some useful tips on how you can create an effective asset allocation strategy tailored to your individual needs and risk tolerance. Additionally, I'll also be discussed 5 asset allocation models including an age-based asset allocation, strategic asset allocation, core-satellite asset allocation, risk-based asset allocation and tactical asset allocation.
Keywords: asset allocation, investment portfolio, multi-asset, dynamic asset allocation, long-term financial goals, risk management, portfolio management, asset categories, effective asset allocation strategy, risk tolerance, financial goals
👉 Video Chapters:
00:00 What is Asset Allocation
00:38 Concept of Asset Allocation
03:07 1. Age-based Asset Allocation
03:54 2. Strategic Asset Allocation
06:30 3. Core-Satellite Asset Allocation
07:49 4. Risk-based Asset Allocation
11:47 5. Dynamic Asset Allocation
14:29 Shankar's Viewpoint
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Disclaimer: I am not a SEBI registered investment advisor or research analyst. The content posted on this platform is purely for educational purposes and none of it constitutes investing or trading advice. Viewers should do their own research and diligence before investing or acting on the information presented
Thanks
It’s a breath of fresh air to see your viewpoint on the same old videos or ideas for topics that nobody chooses. The restrain with which you chose not to discuss Adani when everyone was doing it. Thank you, just want to let you know that there are people like me dying to see this sort of content instead of just getting stock tips.
Thank you Himanshu. This note is a big relief for me as not a week goes by without me wondering if I'm doing the right thing embracing education. I'm not against recommendation/tips .. but where one's own money is involved, I wince at the thought of trusting someone without having the tools to verify that someone's thesis. Happy to receiving your endorsement.
How does one reward a youtuber? Like Himanshu has done here
Tap on the "Thanks" button. It will be on the same line where one sees the Like/Dislike, Share, Download, Clip functionalities.
I was just doing the same asset allocation decision on Excel for the upcoming FY and opened CZcams for a breather, and saw this video uploaded. This is some high level magic, Shankar
Thank you, glad you found it useful
@@shankarnath opp
Has to be one of the best videos that properly explains asset allocation... Contrary to what most utubers suggest like 50-30-20 rule, age rule etc....
Glad you liked it
Dear Sir, you are one of the best content creators in the financial space in India and each video of yours is a new learning for us...
Thank you Suhail for your kind encouragement and endorsement. I too learn quite a bit when making these videos & sometimes I feel ashamed I didn't enquire something in my younger days
Simply the best financial educator..Thanx Shankar ji for enriching us !
So nice of you. Thank you very much
The best video for retail investors just we thinking about only on returns not on asset allocation. Definitely this video will save hard earn money of so many investors.
Glad to know that. Best wishes to all
It takes hell lot of time and efforts to read all comments. Appreciate your work and knowledge Shankar. Respect and Love
Most welcome, appreciate it!
Excellent video! I was searching for a video which could quantify how asset allocation helps in optimising returns with historical data. This was the one! Looking forward to more of such useful videos.
Glad it was helpful!
Another piece of a gem! 🙏
Much appreciated!
This is a great video when I am searching for someone who is expert in Financial planning with Mutual Funds as the major mechanism to invest. This whole understanding of Reducing risk adjusted return using asset allocation and use it with various goals is great concept.
Thanks.
Glad you liked it. The high return-low risk concept is similar to what I often say in regards to value investing - higher the return, lower the risk (and vice versa)
I feel most of your contents must find place in education(school/college/graduation) syllabus..
Hat's off to Prof. Shankar and Team
Happy Ugadi / Gudi Padwa
Happy Ugadi to you too, Dinakar. And thank you for the kind words of appreciation. Asset allocation is important and should be a part of Investing 101. I've been practicing it for a few years now and it gives real stability to the portfolio.
Good one once again!!
Thank you!
Extremally valuable insights. Thanks for sharing!
My pleasure! Glad you liked it
Absolutely loved this format and presentation 👍
Awesome, thank you!
Thanks a lot for this great and helpful video.
You are most welcome!
Really appreciable well designed content 🙏
Thanks a ton Parag
An excellent one.
Many thanks!
So simple ❤️❤️❤️ Guruji Tussi Great Ho 👍
Thank you
Thanks Shankar. Really helpful
Glad to hear that. Happy to know you found it useful
Nice demonstration and good content...❤❤❤
Glad you liked it
As always very knowledgeable video..
Thanks a lot, Ramya Sri
Your videos are gold mine. I wonder why people dont consume this knowledge and run on stock market tips.
Thanks!
wonderfull video sir
Many thanks, Jaskirat
Very information sir
Thanks, glad you found it useful
Hey Shankar! This is a fantastic video. I was waiting for such a crisp and clear video about asset allocation for a long time. You have shared invaluable insights🤩🚀
And could you please share the excel file for the Risk-based asset allocation backtesting you did for the 5 model portfolios? That will help us try out other combinations.
Also, can you make a video on how to leverage Modern portfolio theory to design a portfolio.
Thanks again for such deep and insightful content that you create every week. 🎉
Thank you very much, Sri Suhas. Yes, the excel sheet is a little cramped up now, I'll clean it up and post it by the end of this week.
@@shankarnath That would be very helpful. Thanks again♥️
Shankar thanks for an excellent video. Could you do a video on taxation aspects of dynamic & tactical asset allocation - especially if one allocates funds to different assets? Any suggestions for short term & long term allication based on current taxation? I do know the simplest way out is to buy an dynamic asset allocation fund something like an ICICI Advantage fund you mention. Keep up the good work! 👍
Thanks for the suggestion. Personally, I don't use taxation as a criteria anymore when doing asset allocation. I've spent many years worrying about tax & taking untimely decisions while asset allocation should be tax-impassionate for better results (from a returns and volatility perspective).
But it's very difficult to convince other, including many of my friends. There is the overhanging theme of income tax, where we pay it on income earned and then pay for expenses. In this case, tax is an important criteria as it is being paid on the entire income. However in case of investments, the tax is calculated only on the profits earned and not on the capital invested. If the orientation moves towards that then one would realize that 30%, 15%, 10% on the capital gains doesn't come to much when doing asset allocation and what matters is the process
Excellent video yet again Shankar. I'm glad that you are also shedding light on asset allocation as many are focussed only on chasing returns and forget about safeguarding them. On a side note, it would be great if you could do a follow up video taking into account the recent changes in taxation of debt funds.
Thank you very much
You are awesome 😊
Glad you are finding the videos useful
Hi Shankar, great video. If we follow a Core and Satellite Portfolio for Mutual Funds, which funds do we go ahead with?
Hi Shankar, another master piece, 🎉
I have a question- what is the best instrument within debt mutual fund for long term debt investment asset allocation ?
Thank you. It's difficult to pinpoint a "best" but personally, I use a mix of short duration (money market or ultra short duration) and target maturity funds for my debt allocation. This gives me predictability and stability
Informative video. When you are talking about gold investment, is it digital gold?
Thx. I didn't discuss in terms of instruments. Different gold investment options can be discussed in a different video
Hello, Shankar sir.
Sir, please make a video on how to select different kinds of debt MFs and bonds.
Thanks for your suggestion. I'll add it to my content queue
I have been following you since u were in et money....i appreciate the good work u r doing..
I have a doubt what is the difference between asset allocation which is been performed in et money genius and the momentum mutual funds....it seems both are doing rebalancing every now amd then...and which one should i opt for and if both then how much percentage in each...as my corpus has increased quite significantly....
Thank you for your continued patronage. I am not aware of the updated ETMoney Genius structure, perhaps you can seek answers from them directly. With re: momentum funds, they follow a clear methodology that is available in the Nifty Indices website or else please watch this video: czcams.com/video/xbRiKHchqFg/video.html
Unfortunately, the dynamic asset allocation strategy based on valuations didn't quite work in the bear-bull-bear cycle of 2020-2023. As per the strategy, one would invest more in (long-term or medium-term) bonds when equity valuations are too high. Equity was high during 2020-21 and peaked in the last quarter of 2021. If one had switched to bonds during this period, they still wouldn't have received positive returns from bonds as interest rates started rising after that. Basically, in the past year or so, neither equity nor long/medium-term bonds, nor gold has given returns to investors. Maybe this cycle was an unusual one and it doesn't happen that often.
Kudos for sticking to giving real value in your content. Given the new changes to the taxation for debt funds, what could be better ways to navigate. We still need some form of debt in our allocations. will conservative hybrid be a better bet ?
Thank you! I'm reading some stuff and collating opinions. As you know, I prefer to listen to many sides before coming up with a course of action. I'll write a note tomorrow or day-after.
Hi, the note is here: czcams.com/channels/tnItzU7q_bA1eoEBjqcVrw.htmlcommunity?lb=Ugkx4LYhBvl2FIPbnAxN-eE_hEEU5h-Q2mYq
I'll follow up with a video early next week once I have examined all options
Thanks for this video. @1:20 - Haven't you always of the opinion that higher returns come with lower risk, as you have mentioned in various videos and in some interviews?
Most welcome. Yes - when it comes to value investing .. lower the risk, higher the return. I elaborated this with an example in a recent video aswell .. the Intelligent Investor book summary
Interesting video 👍 I have a question after watching this video.
What is the difference between a multi asset fund and a dynamic asset allocation fund?
Which one out of these two have an option to allocate fully in equities in less risky, less volatile and good economic conditions? And when conditions become riskier, whole allocation can be shifted from equities to Gold, Debt and other less risky instruments?
Thanks 🙏
Pls read: www.morningstar.in/posts/61188/multi-asset-dynamic-asset-funds-consider.aspx
Sir, great information for retail investors like me. Are you planning for any small case like product. Thanks
Glad you liked it. No plans for smallcase .. presently, I'm more comfortable educating rather than fund management/advising.
Hi sir, big fan ..just wanted to know in the current market scenario is it a good time to invest in gold mutual fund?
Thanks
That's it? :-). Gratitude
🙌
Excellent video Shankar! Just one question I've in my mind how can we calculate the correlation between more than two securities or asset classes?
Thank you very much. Correlation is the statistical measure we learnt in school (-1 to +1). There are many articles on the Internet explaining it. Pls try:
seekingalpha.com/article/4485221-cross-correlation
@@shankarnath Thank you! Now I remember correlation matrix or cross correlation! Sometimes the basic slips out of the mind when one gets into the complex calculation.
❤
Hi Shankar Sir, Apologies if you have already answered this but I wanted your opinion on REIT. For a Retail investor like most of us, does it add any meaningful value to allocate to REITS or are we just better with allocation to Equity, Debt and Gold alone? Thank you!
It's a personal choice plus retail investor can be conservative, income, balanced, growth or aggressive .. so it will depend on one's risk orientation and goal. I haven't built an opinion on it yet
Equity is falling & the same time due to inflation bond market is get beaten….I invest 80% in equity and 20% in bond…so, how to rebalance in such period?
Great video! But I don't get how the weighted average of 3 returns (Nifty, bonds and gold) can be ever greater than the maximum of all 3. I would expect the returns of a risk-based asset allocation scheme to be always lower than a 100% equity scheme (given equity performs the best for the period in consideration) even though its risk-adjusted returns and volatility might be better. Thoughts?
I think I get it now. The cumulative returns won't be a weighted average of all 3 (for ex. 0.75*EQ+0.1*B+0.15*G). But the returns for all 3 will act in unison each year. For example, if the portfolio is able to protect a downside in early years, it sets it up nicely for compounding as time progresses.
Yes, exactly. The real effect of asset allocation comes not when one puts in weights against every asset but when one rebalances it in a disciplined manner
Hi just a small question ,the motilal passive fof aggresive and conservative is exactly based on this..does it make sense to have that kind of a fund??
You should evaluate it and see if it matches your personal goals. As I said in an earlier video -- the mutual fund scheme is not your goal, it's the other way around i.e. the fund should help you reach your goals.
Hi Shankar,
Huge fan of your content. Can you please make a video on the new tax law on the debt mutual funds.
Also Is this taxability applicable on all redemptions made from 1st April'23 even though invested earlier or on investments made after 1st April'23 and redeemed there after.?
Thank you! From what I have read, the new law applied to investments made on 1st April 2023 and beyond. The earlier investments will continue to enjoy the previous tax regime. I'm reading some stuff and collating opinions. As you know, I prefer to listen to many sides before coming up with a course of action. I'll write a note tomorrow or day-after.
@@shankarnath thanks for the response, eagerly waiting for your note if can be published before 31st March.
@@anoopperiwal5401 I've posted it on my community page. czcams.com/channels/tnItzU7q_bA1eoEBjqcVrw.htmlcommunity?lb=Ugkx4LYhBvl2FIPbnAxN-eE_hEEU5h-Q2mYq
Please make a video on how to invest in debt instruments. What are your strategies.
Thanks for your suggestion, I'll add it to my content queue
Kindly provide us a video about different debt funds and differentiate it from bank fd.
Thx for the suggestion, I'll add it to my content queue
Shankar sir, it's an excellent video, I am interested in pursuing Ph.D in the finance sector, can you help me sir
Thank you. Sorry, I have no idea on Ph.D in Finance .. maybe, you can consult your university counsellor. Wishing you the best.
Hi Shankar,
First of all thanks for this amazing video. I have question:
Right now, I have all the funds invested in Equity and I am 27 years of age. I started with Equity investing and then I am thinking to move my allocations to different assets other than Equity. What would be a suggested approach to start moving money from equity to these different assets as if I start moving the funds seeing the current market scenario I would book in loss.
Please help me to understand how I can achieve a risk adjusted and diversified portfolio when my all funds are in equity.
Thanks
Sir.. if somebody already investing on physical gold for family needs do they need gold allocation again separately..?
No need to separate, the physical gold should be included in your overall allocation.
@@shankarnath thq sir..
Is it good to consider 20 year long gsec bond in a high interest rate scenario for a 43 year old.
I generally don't play with GSecs (i.e. buy and sell based on interest rates). Instead, I prefer using target maturity bonds for building my debt portfolio in the tenure is high (7+ years). This way I approximately know the returns I'll make
Sir when are you coming up with your small case?
I haven't thought of it yet. Presently, I'm happier educating rather than advising
Sir
Please consider a portfolio allocation with 33% each of equity,gold and debt with annual rebalancing.
Thanks for your suggestion
Sir how is us and indian stock market correlated? Shld it be wise to invest 5-10% in us mfs? Can u make a video on this, about the correlation. I have seen us is positive correlatiom of aroun 0.6
Thanks for the suggestion. I'll add it to my content queue
Hi, please suggest whats the best approach to buy gold.
GLD
SGB
(I really hope you get to see this question before 31 mar)
Sir, if you were to buy debt funds with the sole purpose of holding it for >= 3 years for indexation benefits, what would you choose: a liquid/MM debt fund or an SDL index fund with Target maturity of 2026?
Curious to know - why are only these two choices available?
@@shankarnath Sir as it is said that liquid or money market funds have generally negligible or low credit risk. Also as SDLs/GoIs have sovereign guarantees hence low credit risk, that's why kept thse two choices, as safety of the invested capital is also a priority apart from the other benefits. It'd be great to have your take on this. Thanks again.
@@_s.i.d_ Perfect. Then you have your answers which is per your comfort (i.e. safety) - and that's the way investing should be done. My opinion should not matter at this stage
@@shankarnath found your old video on Target maturity funds quite useful in making this decision, thanks a lot.
Most welcome. I myself use a combination of short duration (MM & ultra short) and Target Maturity Funds for my debt portfolio.
Very informative sir.. please put a separate session on asset management - retirement planning for single people in their 50s and couples without children...as i feel it may not be the same as other people with family-children..
Thanks for the suggestion
How to do asset allocation in case of actively managed mutual fund? Shouldn't it be fund manager's responsibility to do the same?
No, asset allocation is not the fund manager's job as it's not possible for the fund manager to know what assets you have (e.g. you might have EPF holdings, stocks, other mutual funds, land etc.). Asset allocation has to be done by the investor or his/her financial advisor.
Agree. But I am specifically asking in context of profit booking , like in case of flexi cap funds how to know when to pause sip or sell some units or increase the allocation
Didn't understand the calculation. How can asset allocation increase absolute returns? Risk adjusted returns can be improved. But to show asset allocation increased returns to 12% compared to 11% of nifty?
Sir could you please guide us which degree and courses should we pursue to get knowledge like you have .
“The degree of experience “
Please read more often. Here's a great place to start: www.austinvaluecapital.com/resources.html
@@shankarnath this site can't be reached could pleas share another link
www.austinvaluecapital.com/resources.html?
What do you think about real estate investing, That is what I have focused on.
Real estate is an integral and important part of one's portfolio / asset allocation strategy. Personally, I haven't invested in real-estate like I do with equities but I'm sure it has its merits.
@@shankarnath what keeps you from getting into it more? It is mote illiquid?
@@DanKohan Yes, liquidity is an important factor. However, I recently did pick some units in REITs just to test the waters. Fractional ownership is also something I had researched but I parked it as it isn't protected by regulations here
Hello Shankar Sir. I was searching for a video on the exact same topic and lo and behold, you uploaded a video today. Thanks a lot 😊
You see, considering the markets are volatile, I was looking up for some resources to minimise my negative returns. I would be glad if you answer a few questions 😅
So, considering my age to be 28. I consider myself to be a aggressive investor. My equity portfolio consists of mutual funds and stocks. Whereas Debt portfolio consists of ppf and nps. Not sure tho if nps is considered a Debt instrument or not.
Should I add a Debt mutual fund to my portfolio or continue with equity mutual funds considering my horizon is 20 yrs?
If yes, should I choose a mutual fund which invests in bonds or gold? You see, I don't wish to buy bonds and Gold separately.
Thanks again for a valuable information 👍
Kotak Multi Asset dynamic FoF and icici multi asset funds are the best risk adjusted funds. Better than icici balanced advantage fund
how they are better ?
It's means ET money genius diverse our portfolio to different asset class's between equity , gold and debt fund according to market condition
Should we invest in ET money genius or small case to avoid these hectic of investing and give it to some one else
Well, it comes down to individual preferences. For instance & am just taking this as an example - observe you used the phrase "hectic of investing", someone else might say "joy of investing". Now these are two different approaches to the same activity.
The point you raised on giving it to a fund manager is also a relevant one. So the fund manager will run the scheme per his/her objectives (which will be clearly defined in the scheme objective) but that might not be your objective. Again, it is a matter of framing .. if the investor's objective matches with the fund's goals - then there is more comfort.
In my view, it's not a me-or-him choice and investors can always mix and match approaches (and most people do)
How about putting money directly in the Dynamic Asset Funds rather than doing this hassle manually. What are the pros ane cons of this strategy Can you guide?
Look at it this way. You have 100 rupees of portfolio of which 25 rupees is in real estate and 15 rupees in fixed income (say EPF & PPF). These two instruments are fixed as property you don't sell and EPF/PPF has a lock-in. Now as you are young, you want to up your wealth and yet be balanced about it .. so you feel 60:40 in equity & non-equity is great.
If you put the remaining 60 rupees in a Dynamic Asset Allocation fund, the first thing you lose is your asset allocation because the fund manager doesn't know that you have property and fixed income worth 40 rupees in your portfolio. He/she assumes that the only wealth you have to invest is the 60 rupees and because the fund manager too wants to give you a balance .. he/she decides to put 40 rupees in equity & remaining 20 rupees in debt based on current market conditions
Effectively in the fund manager's eyes, you are at a 66%:33% ratio .. while in reality you are at a 40%:60%. Consequently, you will lose a lot.
Moral -- to the extent possible, be in control of your financial destiny. For this I'm not saying you need to overdo it by investing in stocks yourself but allocation is something that you need to hold at heart.
@@shankarnath thank you very much for the detailed explanation. Really helpful.
Its a good and new video. Hope your calculations are correct but great video.
I request to give information abiut NPS allocation
I think one of the problem is comparing equities with nifty 50 only as they can have more than 15% returns easily
Long term indexation benefit of debt funds: you spoke too soon 😂
You make doing this 🧗♀️look as easy as eating this🍨