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00:00 (upbeat music)
00:02 So very warm welcome to our viewers
00:13 to the Outlook Money webinar series.
00:16 This is a part of the investor education
00:18 and awareness initiative of Aditya Birla Sunlight
00:21 Mutual Fund in association with Outlook Money.
00:24 I'm Nidhi Sinha, editor Outlook Money.
00:26 And today our topic of discussion
00:28 is the art of asset allocation,
00:30 which I think is very, very relevant
00:32 in the present volatile times.
00:34 So, but before we start discussing the topic
00:36 with our experts today,
00:37 let me first introduce them to you.
00:40 So first of all, I would like to welcome Mr. K S Rao,
00:43 who's the head of investor education
00:45 and distribution development at Aditya Birla Sunlight AMC.
00:49 Mr. Rao intends to take financial literacy
00:52 and investor education to various demographic segments
00:55 across geographies.
00:57 And he has been working relentlessly
00:59 towards that over the years.
01:00 And he has spent more than two decades
01:02 in the mutual funds industry.
01:05 We also have with us Mr. Amit Trivedi,
01:07 who's an author, speaker, blogger and trainer.
01:10 He has over 26 years of experience in the capital markets
01:14 and he has authored a number of books.
01:17 The most recent being Money Wise Perspectives for Women.
01:21 Last but not the least,
01:22 but I would also like to introduce Mr. Vinod Bhatt,
01:25 who's a portfolio manager and equity strategist.
01:28 Again at Aditya Birla Sunlight AMC.
01:31 Vinod comes with an experience of two decades
01:34 with close to 15 years in the financial markets
01:37 and investment banking space.
01:39 So, and Vinod recently wrote a book,
01:43 which was, you know, which talked about as the allocation.
01:46 So that is also going to be very relevant for us
01:49 in this session.
01:50 So welcome to the webinar series, gentlemen.
01:52 It's a pleasure to have you on the show.
01:54 - Thank you.
01:54 - So now for today's topic,
01:56 asset allocation is something that, you know,
01:58 can help investors tailor their needs,
02:02 their investments according to their needs,
02:04 if I may put it like that.
02:06 And often we see that, you know, sometimes it is ignored,
02:09 but it is one of the strategies that can give best results.
02:12 That's what experts have been saying in the past.
02:15 So for instance, the market is really volatile these days
02:18 and an investor who really has his or her assets
02:23 allocated in different kind of instruments and investments
02:28 may not feel the pinch that much.
02:30 So our experts will elaborate on this concept
02:34 and make us understand in more detail.
02:36 So I will start with Mr. Rao
02:38 and let's start from the basics for the viewers, Mr. Rao.
02:43 So what, according to you, is asset allocation?
02:46 If you could explain that in a bit of detail.
02:48 - Thank you so much.
02:49 Good morning, Nidhi.
02:50 Good morning to my co-panelists, Vinod and Amit.
02:53 And glad to be here.
02:54 I think it is, we took a little longer gap
02:56 for this webinar series and glad we have started.
03:00 Thank you so much for it.
03:01 And indeed, it's a topic is very right
03:03 at this point of time, the art of asset allocation,
03:05 because when markets are volatile,
03:07 we think of asset allocation.
03:08 Otherwise, asset allocation is always need to be taught.
03:10 And as you mentioned earlier about Vinod Bhatt's book,
03:15 he has mentioned very nicely,
03:16 the book is "The Financial Independence Marathon."
03:19 He said the starting, the first step to start your marathon
03:22 is to have an asset allocation.
03:23 You know, that will lead to the last step.
03:26 And let me explain in a term what exactly the asset allocation.
03:30 We speak many a times what exactly it is.
03:32 It is just a simple methodology
03:34 to construct an investment portfolio.
03:36 It is to diversify the assets,
03:39 I mean, diversify the money among the various assets.
03:42 It is, you know, funds you are allocating to these assets
03:45 to get the desired results.
03:47 And I mean, you know, with the desired returns
03:50 with the appropriate risk, what you are.
03:52 Of course, that's not exactly the risk.
03:54 I can say the goal is to reduce risk
03:57 and goal is to enhance or optimize the return.
04:00 And why we do this is because very different
04:03 investment categories will behave very differently.
04:07 And that's a periodically, like, you know,
04:09 when there is a, every asset class is a cyclical in nature
04:12 and different economic cycles
04:15 or the different, like, you know, events happening,
04:19 whether nationally or internationally,
04:20 or it is to the demand and supply.
04:22 These asset classes behave very differently.
04:25 While combining these asset classes, you are optimizing.
04:28 One is minimizing the risk and optimizing the returns.
04:31 And to put it in a nutshell, you know,
04:32 when I do these college programs,
04:35 I ask the students if they ask
04:36 what exactly the asset allocation,
04:38 I put it to them, how many of you go to the bakery?
04:40 And what you do is you ask for a cake.
04:43 And if you ask the cake, the cake,
04:44 the wonderful one which you are eating,
04:46 but if you can bring the same cake you want to prepare it,
04:49 probably you need to go and ask the chef what he did,
04:52 what kind of right mix he did,
04:53 whether it is a flour, sugar, or like, you know,
04:55 essence or whatever the ingredients
04:58 and the time to bake that cake
04:59 and time to bring and give it to you and serve,
05:02 which is a final cake, which has come to you.
05:04 Asset allocation is something like, you know,
05:05 you're baking the right investment
05:07 with the right appropriate mix of these assets.
05:10 And put it in a simpler definition,
05:12 it is a, you are just diversifying,
05:14 you are mixing these assets in such a way,
05:16 you are creating a safe, solid foundation
05:18 for your portfolio.
05:20 And I recall from my academic days, you know,
05:22 the asset allocation which we spoke,
05:24 I mean, whether it is a modern portfolio theory to put it,
05:27 I mean, you know, it's about,
05:28 most of us would have read about our portfolio management
05:31 about Harry Markov is who won the Nobel Prize
05:34 for like, you know, this portfolio construction,
05:38 probably from 1952 to 1972 when he won the Nobel Prize,
05:41 probably, like we spoke more of the time asset allocation,
05:45 but I have not find someone who follows
05:47 with a discipline and with a commitment.
05:50 Probably if we can stick to the discipline and commitment,
05:53 this will become a key for our investment planning.
05:56 We all do investment planning
05:57 and the element of the investment planning
05:59 is once you start, the first step as Vinod said
06:03 is to have a right asset allocation,
06:06 but right asset allocation followed by the right discipline
06:09 and also a right commitment.
06:12 And before Amit coming in with a Bollywood examples,
06:16 let me conclude the saying art of asset allocation,
06:19 which is I call AAA,
06:20 that is in a Bollywood example is
06:23 you have Amar Akbar and Anthony,
06:25 you have a wonderful play to enjoy your investments.
06:28 - Right, Mr. Rao, another interesting example,
06:31 another session.
06:32 So of course you have to bake the cake, right,
06:35 so that it tastes right and serves you right, of course.
06:38 And so coming to you, Mr. Trivedi,
06:42 I'll pull you into the discussion
06:44 and we were talking about the volatile markets, et cetera,
06:47 which is the current environment,
06:49 not just in India, but all over the world.
06:51 So how do you think asset allocation
06:53 really makes a difference in this kind of environment?
06:57 - Let me start with a negative answer.
07:00 Asset allocation does not make a difference.
07:03 Following asset allocation makes a difference.
07:05 - Okay.
07:07 - So if you, yeah, if somebody,
07:09 and I picked it up from Rao sir's answer,
07:14 because he used a particular word called discipline.
07:17 Now, if discipline is missing,
07:21 if that perseverance is missing
07:25 in following that asset allocation
07:27 through the ups and downs,
07:28 through the good times and bad times,
07:31 then it doesn't help.
07:32 Consider that, and as Mr. Vinod Bhatt
07:37 has written in his book, beautiful book,
07:39 that this is the starting point.
07:42 So let me put this question back to our viewers.
07:47 When do you buy a fire extinguisher?
07:49 Not when the house is on fire.
07:51 You do buy it much in advance.
07:53 So asset allocation is not something that you do
07:56 when the markets have turned volatile,
07:59 when everything is falling down.
08:01 That's not the time when you think of asset allocation
08:03 and do it.
08:04 That is an indiscipline way.
08:06 You do it right from the word go,
08:09 and that word go means,
08:10 if you didn't do it yesterday, do it today.
08:13 But start now, don't wait for the markets to turn nasty.
08:17 Because the way asset allocation helps is,
08:21 and looking at the current markets,
08:23 even after following the right
08:26 disciplined investment approach,
08:29 you can't really stop the markets from falling.
08:32 And that's what I would quote that beautiful proverb
08:36 which says, "You can't direct the wind,
08:38 but you can adjust the sails."
08:40 So it is the adjusting of sails
08:42 where asset allocation comes in.
08:44 Okay, thank you for that perspective, Mr. Trivedi.
08:47 And now I'm coming to Mr. Bhatt.
08:49 Mr. Bhatt, like Mr. Rao also,
08:52 you also have spent a long time
08:54 in the mutual fund industry.
08:55 So coming to mutual funds in particular,
08:58 how do you think mutual funds can really help a person,
09:02 an investor, a retail investor,
09:04 do and follow proper asset allocation?
09:07 - So, I think the mutual fund industry is already
09:11 providing what we call solution-oriented products
09:14 to make the life of our investors simpler.
09:18 So typically, if you see investors or the advisors
09:22 have to track markets,
09:24 if they want to do it on their own,
09:25 figure out which asset class might do well,
09:28 and then they have to worry about which funds
09:30 or ETFs to select in each asset class.
09:32 So there's a lot of time and effort that is involved,
09:34 not just to build the initial portfolio,
09:36 but to keep tracking it and making changes,
09:40 which is called rebalancing.
09:41 So instead of doing all that,
09:42 investors can just look at some solution-oriented products,
09:46 like the asset allocation fund or funds,
09:49 which we also provide.
09:50 So in that, the first advantage is that
09:52 you get automatic portfolio diversification.
09:54 So we provide exposure to four different asset classes,
09:58 like domestic equity, international equity,
10:00 fixed income and gold.
10:03 And then there's a dedicated portfolio manager
10:06 who essentially tracks the market
10:09 and decides which mutual funds or ETFs
10:12 to select in each asset class.
10:14 And then they also kind of figure out
10:17 when to rebalance the portfolio.
10:19 If, for example, equity markets have corrected,
10:22 then they will increase the equity allocation.
10:24 If equity markets have rallied too much,
10:26 then they will reduce the equity allocation.
10:27 They'll see how much allocation to make gold
10:30 or fixed income and so on.
10:32 So the portfolio diversification
10:35 ensures that because of the negative correlation
10:37 between these asset classes,
10:39 you get stable risk-adjusted returns.
10:40 It's not like you get positive 20% return one year
10:44 and negative 15% return the next year.
10:45 What you really want is like every plus three or 4% return
10:49 on a consistent basis.
10:50 So that's the objective
10:52 of this kind of a solution-oriented product,
10:54 which is called the asset allocation fund.
10:55 The other advantage is that
10:58 it also lowers the cost for investors.
11:00 So when investors make any changes
11:01 in their portfolio, typically,
11:03 they have to pay the short-term
11:04 or long-term capital gains taxes.
11:06 Whereas when these kinds of changes
11:08 are made in the fund-of-fund,
11:10 there are no tax implications for the investor
11:11 because the fund-of-fund is also
11:13 just another type of mutual fund.
11:15 So until the investors redeem their fund-of-fund units,
11:18 they don't need to pay any tax.
11:20 Lastly, it's very affordable and convenient.
11:24 So even if, for example, an investor wants to start an SIP
11:27 or make an investment, even just a few hundred rupees,
11:30 they can invest that amount in the fund-of-fund
11:32 and still they will get the underlying diversification
11:35 across these different asset classes.
11:37 The funds are already chosen for them
11:39 and the portfolio will be rebalanced on a regular basis.
11:42 And they just need to kind of read
11:44 this one statement of this one fund-of-fund.
11:46 They don't need to worry about monitoring statements
11:49 of 10 or 15 different funds.
11:51 So it makes life very simple and convenient,
11:53 gives them the advantage of portfolio diversification.
11:56 And also there is a dedicated portfolio manager
11:59 who manages the underlying investments for them.
12:01 - Okay, so just to clarify to our viewers also,
12:04 fund-of-funds are those funds
12:06 that basically invest in other mutual funds.
12:09 - Yes.
12:10 - Yeah, so the fund-of-funds that you're talking about,
12:14 Mr. Bhatt, I'll continue with you on this point,
12:17 is that another category that kind of caters
12:22 to a similar kind of need is the balanced advantage
12:26 of hybrid funds, as we call it.
12:28 So what about those categories in comparison to FOFs?
12:32 Because FOFs, I believe, I'm not too sure,
12:35 but maybe the expense ratio there
12:37 would be a little different from balanced advantage funds.
12:39 So which one do you think is more suitable?
12:42 - Right, so the biggest difference is, for example,
12:45 the balanced advantage funds give exposure
12:49 to two asset classes, domestic equity and fixed income.
12:52 Whereas the asset allocator fund-of-fund
12:54 gives exposure to four asset classes typically,
12:56 which is domestic equity, international equity,
12:58 fixed income, and gold.
13:00 And if you see the historical data
13:02 for the past five, 10 years of the returns
13:04 from different asset classes,
13:05 we see that every year some different asset class
13:09 has performed well.
13:10 So one year domestic equity might do well,
13:11 another year international equity might do well,
13:13 third year gold might do well,
13:14 fourth year fixed income might do well, right?
13:16 So from a portfolio diversification point of view,
13:19 it's important to have all these four asset classes
13:21 in the portfolio, not just the two asset classes
13:24 that the balanced advantage funds provide.
13:26 And from an expense point of view also see that
13:30 FYFs invest in the direct schemes for the mutual funds
13:33 and in the low-cost ETFs.
13:36 And as per the SEBI mandate,
13:39 they can't charge more than twice
13:41 the weighted average expense
13:42 of the underlying mutual fund portfolio.
13:45 So there is a cap on the expense ratio also.
13:48 So given the advantages that the fund-of-fund provides,
13:50 the expense ratio is quite reasonable
13:52 because a dedicated portfolio manager
13:55 is doing all the work and managing the portfolio.
13:57 - Right, right.
13:58 And do you think that these are like the perfect kind of funds
14:03 for asset allocation that you think some of maybe
14:06 the evolved investors who really want to do it themselves
14:10 can go to assets separately,
14:13 like if they want to invest in gold,
14:14 so maybe they go to a gold fund and equity fund
14:17 and debt fund and so on.
14:19 So what do you think about that?
14:22 - Yes, so to clarify, asset allocation funds
14:27 as well as balance advantage funds,
14:29 they are more suitable.
14:31 One is, for example, for first-time investors
14:34 who may not know the nuances of the market
14:37 or investors who don't have the time or the interest.
14:41 Not really everybody is interested in tracking markets
14:44 on an everyday basis.
14:46 So that is one.
14:46 Second type of investors are those
14:49 who don't want too much volatility in the portfolio.
14:51 Like I said, I mean, some investors are okay
14:53 if they get a positive 20, 25% return one year
14:56 and a negative 15, 20% in one year.
14:58 So they're okay with the volatility,
15:00 but some investors don't want that volatility.
15:02 So even for them, asset allocation funds would be good
15:05 because the objective there is to give a FD plus T
15:07 to 4% return on a low volatility,
15:10 like a lower risk basis essentially.
15:12 But if investors have the knowledge and they have the time,
15:17 they have the interest to track markets,
15:21 to figure out what their ideal asset allocation should be,
15:23 which funds or ETFs to select in which asset class,
15:26 then definitely they can do it on their own.
15:28 Or they can have their financial advisor
15:29 also do it for them.
15:30 - Sure, sure.
15:31 So now coming to Mr. Rao,
15:33 we've been talking about how mutual funds can help
15:36 and these are some ready-made mutual funds
15:38 that can really come to the aid of investors.
15:40 But for a person like we were talking,
15:44 for a person who wants to do it on their own,
15:47 the asset allocation,
15:48 what do you think is the ideal debt equity ratio
15:51 for such an investor?
15:52 - I think for this question,
15:54 probably I'll take it from where Vinod was speaking earlier.
15:57 Probably the right ideal asset allocation,
15:59 it depends on the person to person,
16:01 how you are looking at it.
16:02 It's like the way we talk about the personal finance,
16:05 even asset allocation,
16:06 the way you are taking a risk.
16:08 I mean, it's like,
16:09 end of it, it is a right mix of investments,
16:12 which can give the total return.
16:14 Probably it returns the total return
16:16 over a period of time,
16:17 what the investor is looking for it.
16:19 And each of us will have a different flavor
16:21 for the different asset classes
16:22 and different risk tolerance levels.
16:24 Probably I'll put it under a 3T framework.
16:27 The 3Ts are the first one,
16:29 what is the timeframe you are looking to invest
16:31 before you are done?
16:32 What is the timeframe you are looking at?
16:34 And second is the tolerance to the risk
16:37 and tolerance to the declines.
16:39 And sometimes I feel I have a tolerance to the risk,
16:42 but when the decline is very higher,
16:44 I can see why SIPs get stopped
16:47 during the corrections period,
16:49 because once the decline is coming,
16:50 their risk tolerance is much lower.
16:52 I mean, when we go to the blood test,
16:53 it's a glucose tolerance level,
16:55 like the way people are looking at their tolerance level
16:57 are very less when it is,
16:59 when the declines are coming.
17:00 And the third one is a trade-off between,
17:03 I can wait for the market correction period
17:05 that will reduce the NAV for a short period of time,
17:08 but in the long term, it gives the return.
17:10 What is the trade-off I'm looking at,
17:12 between reducing the short-term decline
17:15 and the long-term return?
17:17 If I can frame these three into this,
17:19 probably you can create a right asset allocation,
17:21 not only equity and debt,
17:23 probably I will call edge of asset allocation.
17:25 That is the equity, EDG, equity, debt, gold,
17:29 and the last is the real estate.
17:31 And what kind of combinations you need to,
17:33 and what kind of risk you can take.
17:35 I think, Vinod was mentioning in his book,
17:38 the ideal combination of debt equity to the gold
17:42 for the larger people.
17:43 In one of the conversations he was mentioning is 70,
17:45 20, 10, or 65, 25, 15.
17:49 Sometimes why you need to have a 65 in equities,
17:53 if it's in the balance funds,
17:54 funds he's managing,
17:55 where he can look at,
17:57 it can give a tax efficient.
17:58 Probably investors also need to look at
18:00 the ideal allocation is,
18:01 how that can trade off and how they can get.
18:04 And there is various models which are available.
18:06 People can choose as per that.
18:08 It could be a strategic allocation
18:09 or it could be a constant asset allocation,
18:11 which one, like for example,
18:13 many of them have a strategic asset allocation,
18:14 which can work for them.
18:15 For some people, it's a constant.
18:17 And that also does work because every corrections,
18:19 you can realign, rebalance it.
18:22 Then there could be a tactical allocation.
18:23 People can play with the market.
18:25 If you understand it a little more,
18:26 you have a little more versatile.
18:28 And the last one could be the very dynamic
18:29 asset allocation, which is like,
18:31 during good times,
18:32 you are with the good assets
18:33 and the asset is not going to perform
18:35 as you are aware you move out
18:36 and you will have a dynamic asset allocation.
18:38 And whichever the strategy,
18:40 ideal asset allocation is,
18:41 depends on each individual
18:43 and the asset class which you adapt
18:46 is what kind of return you would like to,
18:48 you intend to get
18:50 with what kind of risk you are taking in.
18:52 - Absolutely agree.
18:53 Asset allocation is about your needs and requirements
18:56 and your very, very personal circumstances
18:58 that each investor has.
19:00 So coming to Mr. Trivedi,
19:02 you were talking about the last answer
19:04 when you were talking about was how,
19:07 when people come to the markets,
19:09 that's not the time to do asset allocation
19:11 and it should be started right from the beginning,
19:14 like right from the beginning
19:15 when you start the investing journey.
19:17 But in the last past two years,
19:19 I think we saw many young investors entering the market
19:23 and we're not too sure whether,
19:24 you know, they did understand
19:26 the concept of asset allocation,
19:27 especially because of all the buzz of,
19:30 you know, high values and all of that.
19:33 So what do you think their strategy should be now?
19:36 Is it a good time to make a new beginning in that sense?
19:41 - So I recall a quote that is attributed to Warren Buffett,
19:46 which said that the best time to plant a tree
19:48 was 20 years back.
19:49 The next best time is today.
19:51 I think that principle applies to this also.
19:53 So if you didn't do in the past, do it today.
19:55 That's okay.
19:56 I mean, it's not so much about the state of the market.
20:01 It's all about, you've got to make a beginning
20:05 at some point in time.
20:06 And if you not made a beginning, do it today.
20:09 So that's how I put it.
20:13 Having said that, I'll just pick up a few things
20:18 from what Mr. Burton Rausser was mentioning.
20:21 You know, how do you start your asset allocation?
20:25 So let's say in my house, there are four of us,
20:29 three of us drink tea,
20:31 and all the three prefer different, you know,
20:34 flavors of tea.
20:36 So I like it strong.
20:38 My wife doesn't like it strong.
20:40 My daughter says less milk.
20:42 Now, there are three different people who want it different.
20:45 Now, this is all about preferences.
20:47 But when it comes to the portfolio construction,
20:50 it is all about one's objectives.
20:53 And these investment objectives for myself
20:56 have to be in line with my financial goals.
21:00 So all the investors who started in recent past
21:03 without really worrying about asset allocation,
21:05 my simple request would be list down your goals.
21:10 And what are these goals?
21:12 These are nothing but the way you want to live your life,
21:16 what kind of life that you want to live,
21:18 and convert those into financial goals.
21:21 So for a particular kind of life,
21:23 I would say that I want a vacation once every six months,
21:28 for example.
21:30 Then make that as your financial goal,
21:33 every six months.
21:35 So that is the timeline.
21:37 And allocate some amount of the value to that goal.
21:41 Of course, that value would keep changing
21:43 from vacation to vacation and inflation and stuff like that.
21:46 But at least start with assigning value.
21:49 So start with your life, convert it into a financial goal.
21:54 Once you've done that,
21:56 then what do you need to achieve that?
21:58 In certain cases, you need regular cash flow.
22:01 In certain cases, you need liquidity.
22:03 In certain cases, you need capital appreciation.
22:06 Now, these are the primary three objective
22:09 for any investment program,
22:12 safety, liquidity, and returns.
22:14 It's like, because Rao sir insists,
22:18 I'll come to Bollywood.
22:19 It's like a Hindi movie where you have a hero,
22:23 you've got a heroine, you've got a villain,
22:25 you've got a comedian.
22:26 But that is asset allocation in the Hindi film,
22:28 or a character actor or character actors.
22:30 So you've got that, you need those components
22:34 to make a solid movie.
22:35 Of course, the script, et cetera, direction,
22:38 that those things also matter a lot.
22:40 And if you extend it,
22:43 that also is part of asset allocation, how you approach it.
22:47 But coming back to the investor's objectives,
22:51 once you define the safety, liquidity, returns objectives,
22:54 then you need to pick up funds
22:56 which have the potential to fulfill those objectives.
22:59 So an equity mutual fund
23:03 can provide long-term capital appreciation.
23:06 A debt fund has a potential to provide safety
23:09 with probably a regular income,
23:11 and a liquid fund would offer liquidity.
23:14 Now, add a couple of other asset classes.
23:17 You look at gold, for example,
23:19 and you can put it in the long-term portfolio
23:21 because there's no current income.
23:23 Once you put these things together,
23:26 so you've got investment objectives of the investor,
23:30 and you've got investment objectives of the schemes,
23:32 and then now you start matching.
23:35 Because each investor's objectives are different,
23:38 each one would get a different portfolio.
23:41 And that's why asset allocation becomes first.
23:44 So my team will be stronger than what my wife prefers.
23:47 - Right, right.
23:49 - I can't drink the tea that she does,
23:51 and she doesn't like the tea that I drink.
23:55 So it applies to every investor.
23:58 Put these things together.
24:00 Now, if you are not able to do this,
24:04 take professional help.
24:05 And I think most people will not be able to do it.
24:08 Take professional help,
24:09 take the help of a mutual fund distributor
24:11 or an investment advisor.
24:13 Go and discuss these plans, ideas, et cetera.
24:17 And if required, as Mr. Budd very beautifully explained
24:20 about the balance advantage funds
24:23 or the other asset allocation fund of funds
24:26 or other hybrid funds,
24:28 I think these are also combinations.
24:30 So I take my dal and chawal separately,
24:32 or I take khichdi and eat it.
24:35 So that's your hybrid fund.
24:38 The khichdi is the hybrid fund
24:39 where you combine both dal and chawal.
24:41 What do you want to achieve?
24:43 There are solutions available within the mutual fund basket.
24:47 Not each solution may be applicable for each investor.
24:51 And that's why that entire exercise
24:54 of doing the right asset allocation
24:57 must be conducted in order to get
25:00 that edge of asset allocation.
25:02 - Right.
25:03 So we've all been talking about this,
25:05 how asset allocation depends on an individual's needs
25:09 and requirements, circumstances, et cetera.
25:12 So Mr. Budd, do you think considering that,
25:16 the different varied needs of people and investors,
25:19 should there be different strategies of asset allocation?
25:22 In fact, I believe there are.
25:23 So could you elaborate on that,
25:25 on what kind of strategies that investors can undertake
25:28 for asset allocation?
25:30 - Yes, so see, typically,
25:33 one can follow either a quantitative strategy
25:36 where you use some models,
25:37 some numbers to support your decision,
25:39 or one can follow just a purely qualitative strategy
25:42 where you just analyze or think about what's going on
25:45 in the markets and different asset classes.
25:47 Or third is a mix of the two,
25:48 where you use both a model to support your decisions
25:52 and then some human intervention
25:54 to take the final decision, right?
25:57 And you will see that typically in balanced advantage funds,
26:00 hybrid funds or asset allocation funds,
26:02 there is a mix of the two.
26:04 So even in our asset allocation fund, for example,
26:07 we start with a quantitative model,
26:09 which looks at various valuation metrics
26:12 and gives us some signal as to what should be
26:13 the allocation to different asset classes.
26:16 But you can't just rely 100% of the model
26:18 because at the end of the day,
26:19 it's like garbage in garbage out.
26:21 Like, for example, during COVID,
26:22 what happened was the earnings of all the companies
26:26 declined dramatically.
26:27 So the price to earnings ratios got artificially inflated.
26:31 And all the models suggested reducing equity
26:33 because typically when the valuation multiples are higher,
26:36 the model suggests reducing equity, right?
26:38 But we understood that that was not the right signal.
26:43 And hence we maintained our equity allocation
26:45 during that period.
26:46 And that's where the human element comes in, right?
26:48 So the second step, once the model gives us some signal,
26:52 the second step is that we take inputs
26:54 from our fund managers, from our analysts,
26:57 and the strategists, we take inputs from our economists.
27:01 We bring all this together
27:03 and then we take the final decision, right?
27:05 So that's what, like, you know,
27:06 if somebody wants to do this on their own, right?
27:09 Or go through a financial advisor,
27:10 that's what they would have to do.
27:13 Ideally have a mix of a quantitative model
27:16 that gives some signal and then a human overlay.
27:19 Because also what happens is,
27:21 if you don't have some quantitative backing,
27:25 if the market crashes 40, 45%,
27:27 like what happened March 2020,
27:30 most of us would not have the courage
27:32 to put our money in at that time, okay?
27:35 And what the model does at that time,
27:36 it gives you the confidence that,
27:37 hey, like, you know, valuations have fallen.
27:39 So you put in, you increase your equity allocation.
27:42 But if the market rallies very quickly,
27:44 then most of us would think that, you know,
27:46 market has rallied, it can continue going up.
27:48 But what the model will tell you is,
27:49 hey, listen, the market has rallied very quickly,
27:52 valuations have risen,
27:52 so please reduce your equity allocation, right?
27:55 And that's what helps us to act
27:57 and overcome our behavioral biases.
27:59 So that's what, like, you know,
28:01 you can follow either quant strategy
28:04 or just a qualitative strategy or a mix of the two.
28:07 Best is to follow a mix of the two.
28:09 - Okay, that's a very, very interesting point
28:11 that you have raised, that, you know,
28:12 that whole issue of human biases,
28:15 I think everybody experiences that,
28:18 most investors experience that in different forms.
28:20 And this is, of course, a very important example
28:23 when it comes to market behavior,
28:25 people's behavior get, you know, affected accordingly.
28:29 Spoken about how asset allocation can really help us,
28:32 but are there any pitfalls of not doing asset allocation?
28:35 Could you elaborate on that, Mr. Rao?
28:38 - Thanks, Nidhi.
28:39 I mean, you know, apart from the strategies,
28:41 you know, sometimes we try to get the best of the strategies
28:44 and it may work and it may not work.
28:46 And, you know, like, for example,
28:48 if I'm playing a T20 and I have a lot many fast ballers
28:52 and the match is going to,
28:53 the pitch is going to be the spinners one,
28:56 then, you know, if I'm not having a right combination,
28:58 there is a match I'm going to lose.
29:00 Either way, sometimes I may win
29:01 without even having a fast baller, but only spinners.
29:04 Means one single asset class can perform for longer run.
29:06 And if I'm sticking there, I may do well.
29:09 And diversification does not need to work 100% of times,
29:13 but let me tell you,
29:14 there is a research paper which is available.
29:16 I think it's a Gary Brinson, 1986,
29:19 which is the first paper which I was reading about
29:22 is the 93% of your portfolio return
29:25 comes out of asset allocation.
29:26 Later, many papers suggest 85 to 90% of your portfolio
29:30 returns are coming from the asset allocations.
29:32 And only 10% of the times, or 15% of the times,
29:34 it may not perform, because in the market,
29:36 last two years, I would have seen
29:38 if I have an exposure to my,
29:39 like, you know, if I have a right asset allocation,
29:41 still, if I'm not exposed to equity, right,
29:44 I would not have made money.
29:45 Similar thing, some time back, that's where.
29:47 And there is another way, the biggest pitfall is,
29:50 like, people too often change their asset allocation.
29:53 And there are people whom the investors have seen,
29:56 they never look at changing the asset allocation,
29:59 irrespective of the market conditions.
30:01 And, you know, and it's like, you know,
30:02 timing in the market, or time in the market kind of paper.
30:05 And sometimes we are owning, under-owning,
30:07 or sometimes we are over-owning the one asset class.
30:10 That's another way we can look at.
30:12 And sometimes we are too aggressive.
30:13 Sometimes we are, like, you know, too conservative.
30:16 And last but not the least, why we fail is,
30:20 we do not have an, like,
30:22 someone is not having the right plan.
30:24 And that's where the entire stuff will come back,
30:27 and, you know, you just invest for the sake of investing,
30:30 and you don't make money, and we blame.
30:32 There is a time auto-asset allocation will work.
30:34 That's time asset allocation funds will work.
30:36 There is a time hybrid funds will work,
30:37 because you don't need to do everything.
30:39 Then that will come.
30:40 And, you know, somebody rightly put it, you know,
30:42 I have all the assets, all the asset classes,
30:44 the three asset, four asset classes,
30:46 equity, debt, gold, and real estate.
30:48 But what the other asset class I have in my mind
30:50 is the three things, which can pep up my investments,
30:54 is the first P is the pep up is P is the patience.
30:57 And the second is my experience
30:59 during good times and bad times.
31:00 And the last one is the perseverance.
31:02 And to have that, my, I mean, no returns to get,
31:05 I need to get that pep up, then I can have that edge.
31:08 And last but not the least,
31:09 I can say is in the mutual funds when it comes,
31:11 you may have a best of the asset allocation,
31:13 you know, that is a AAA art of asset allocation.
31:15 And there is a SSS which can work,
31:17 which is the science of scheme selection.
31:20 And when you don't know the science of scheme selection,
31:22 just stick to the asset allocation fund.
31:24 And I call, like, you know, during our programs,
31:26 I call the science of scheme selection,
31:28 the SSS, I call it as a Satyam, Shivam, and Sundaram.
31:32 The scheme should be Satyam,
31:33 the truthful to the mandate given.
31:35 And Shivam is it should give the right returns
31:38 and the right processes.
31:40 And Sundaram is it can give the,
31:42 the beauty can come when you manage it right
31:44 for the long term.
31:45 And that is a fund you can choose when you are at home.
31:48 - So, okay, that's an interesting analogy.
31:50 So whether our investors want to stick
31:52 with Satyam, Shivam, Sundaram,
31:54 or Amar, Akbar, and Anthony is their choice.
31:56 Of course, it's just a way of saying the same thing
31:59 in two different, very interesting ways.
32:01 So your last word on the topic, Mr. Trivedi.
32:04 - I've got two things to say out here.
32:06 And because Rao sir started with Amar, Akbar, Anthony,
32:09 I can't resist myself from mentioning Mr. Amitabh Bachchan.
32:13 When you invest in any asset category,
32:17 remember that the superstar of the millennium,
32:21 Mr. Amitabh Bachchan also gave some flop news.
32:26 So even the best of the asset category
32:29 will undergo some periods of underperformance.
32:33 And it does not mean that you've got to get out of those.
32:38 Right, so that's point number one.
32:41 Now, how do you ensure,
32:43 because Rao sir also mentioned one beautiful thing
32:45 that people keep changing their asset allocation.
32:49 And my experience suggests that the change
32:51 in asset allocation largely is on account
32:54 of the fear and greed that people oscillate between,
32:59 often on account of the immediate past performance.
33:04 So whatever has happened in last six months
33:06 or whatever is the world is chasing,
33:09 and that's what people really chase.
33:11 And that's what again, I'll invoke Mr. Bachchan.
33:15 In the movie, "Kalia", his famous dialogue was that,
33:19 (speaking in foreign language)
33:22 But most investors follow it exactly in the worst case.
33:28 They say (speaking in foreign language)
33:30 So when everybody is buying, if I'm in the queue,
33:33 I'm not going to make money.
33:35 So let's understand that as well.
33:37 So how do you create your own line?
33:39 (speaking in foreign language)
33:41 The only way to do is start with your goals,
33:44 decide your asset allocation
33:48 in order to achieve those goals.
33:50 And then because your life and your goals
33:52 are going to be unique to yourself,
33:54 your line would be very different
33:57 and you don't have to stand behind somebody in the queue.
34:00 I think if we take care of this part,
34:03 a lot gets taken care of.
34:06 Now, how do we ensure that even after doing this,
34:11 over a period of time, I don't lose belief
34:14 and I stick to this particular plan
34:16 and that's where the models that Mr. Bachchan was mentioning
34:20 come into picture.
34:22 The quant model or qualitative model
34:26 or a combination of the two.
34:27 I think a combination of the two makes immense sense
34:31 simply because when there are rules formed,
34:34 you stick to those rules and the rules start dictating,
34:37 but the human aspect comes in, the judgment comes in
34:41 as a sort of refinement of those rules.
34:45 And periodically, the human judgment
34:48 also changes those rules.
34:49 The last thing that I would add to this
34:54 is rule-based versus human-based approaches
34:56 because all of us are humans,
34:58 we are vulnerable to making mistakes
35:00 and that's where we need some guidance, some coaching
35:04 and that's why taking professional help
35:06 makes a lot of sense.
35:08 - I would agree on that,
35:09 that taking professional help makes a lot of sense,
35:13 especially for retail investors.
35:15 And thank you so much, gentlemen,
35:18 for your insights on this very important topic.
35:20 And for our viewers, of course,
35:22 there were so many takeaways,
35:23 there are different strategies that you can use.
35:25 We spoke about how you can be patient
35:28 and persevere a bit
35:31 and look at different instruments
35:33 to really do it right, to bake the cake right,
35:37 as Mr. Rao had put it.
35:39 And of course, the industry has the right kind of products
35:43 to help you do that,
35:45 as Mr. Bhatt elaborated during the conversation.
35:48 So thanks a lot, gentlemen, for sharing your insights
35:51 and being part of this conversation
35:53 and good day to our viewers.
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