Reduce portfolio volatility by investing across asset classes, says expert

As data from the past 10 years demonstrate, no one asset class performs every year. Only if you allocate across various asset classes will your portfolio benefit, irrespective of which class performs in a particular year. A diversified portfolio is key to achieving financial goals

A BASIC ASSET ALLOCATION APPROACH

• In a long-term portfolio, allocate to equities using 100-less-age formula. A 30-year old will have a 70 per cent allocation
• More risk averse investors should have lower equity allocation than dictated by this formula
• Allocate 10-15 per cent to gold
• What is left may be allocated to fixed income
• Within equities, allocate around 15-20 per cent to international funds
• Of what is left, allocate 70 per cent to large-cap funds and 30 per cent to mid- and small-cap funds

“Often investors tend to invest in one asset class only, based on their personal preference. The key is to allocate one’s investment across asset classes so that the portfolio is not affected by volatility in a particular asset class. Also, different asset classes respond to various macroeconomic developments in different ways. Hence, following asset allocation is important for the performance of one’s overall portfolio and for long-term wealth creation. Within mutual funds, diversify across equity, debt, international funds and gold. Equities tend to be volatile in the short term but can offer good returns over the long term. Investment in fixed income offers safety, liquidity and reasonable returns. Investing in gold provides a hedge against inflation,  and international funds provide exposure to global markets. Do this exercise under the aegis of a financial advisor”, said S Naren, Executive director & chief investment officer, ICICI Prudential AMC