When it comes to personal finance, asset allocation is an important aspect in one’s wealth creation journey. In this discussion, learn why asset allocation matters, how one can go about with asset allocation when creating a portfolio and much more.
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00:00 My name is Ramesh Biswas, I'm from Bangalore. I started my own firm in the year 2013, it's
00:06 almost 20 years now. So prior to that, I worked in few corporate and there's almost 20 years
00:12 of experience in the MFP business.
00:15 Nice to meet you. And I hope you're having a nice day wherever you are based.
00:19 I'm based in Bangalore.
00:20 Okay, fabulous. So like I said, the whole idea of this conversation is going to be about
00:25 mutual funds. And my first question to you is, what is your definition of a strategic
00:29 multi-asset allocation mix when it comes to mutual funds?
00:33 Okay, multi-asset allocation fund is a mix of diversification with enhanced risk and
00:40 return potential. And asset allocation is critical for the wealth creation for the investors.
00:48 So it's very important that the investors invest in a certain asset class which can
00:54 give them a maximum return. So in case of asset allocation, each asset allocation will
01:01 behave in a different manner over a period of different economical cycle. So choosing
01:08 asset allocation is the best for the investor to, is a better option. So in case of asset
01:14 allocation, for my definition would be, this asset allocation will be investing in equity,
01:19 debt, gold and real estate investment just. Okay. So equity actually will aim to provide
01:28 capital appreciation, debt will aim to provide stability in the portfolio. And gold will
01:34 naturally edge against the inflation and the currency risk. So other things, since it's
01:39 managed by mutual fund, the professional manager will look at all this combination, all the
01:44 three, four combination, whichever is attractive, different market condition, they'll be investing
01:49 different asset classes. A professional manager will definitely look at the deep valuation of
01:55 the stock market and explore the equity explosion and reduce the equity exposure when the market
02:00 is very volatile. Okay. So you've actually given me the points for the next two questions that I
02:05 had in mind. One is you mentioned about gold. Now it has been noticed that traditionally
02:09 Indian investors are inclined towards gold. Now, exactly how can this asset be a good hedge
02:15 against inflation, like you mentioned, and what factors make it a safer bet when it comes to
02:20 situations when the market is experiencing high volatility?
02:26 See, if you look at the basic idea for the asset allocation to benefit the investors,
02:30 in a matter of investor, no matter how the economic situation is, so they will have to
02:38 choose this kind of fund so that the risk in their investment will mitigate, it will reduce
02:45 the risk and give them the maximum return. So gold actually will work against, it will
02:51 edge against the inflation. And it will also edge against the currency depreciation.
02:58 Okay. Fair enough. Gold is one way to hedge against inflation, but like you also mentioned,
03:03 having a multi-asset allocation also is another safe weather, fair weather against inflation.
03:10 Can you also explain, elaborate on exactly how that happens when you have a multi-asset
03:16 allocation and how such a strategy helps in long-term wealth creation?
03:21 So Indian actually consider gold as a safe investment bet because they feel always that
03:26 gold is a safe investment and they would be investing more into that. They also feel that
03:30 it will get against inflation and the market volatility. So gold actually historically
03:39 has shown a positive correlation with rising prices. It is appreciated well when real estate,
03:45 when real rate of return is low. During the time of turmoil, the inflation at zero purchasing
03:52 power of currency, the gold is appreciated in value. Okay. If you look at the, during the
03:57 market downturn, the gold price movement has shown a low correlation with the other financial assets
04:02 like stock market and bonds. During the period of high inflation, gold performance can provide
04:09 a counterbalance, helping to reduce the losses. Gold is a global acceptance metal. It attracts
04:19 global investors and even during market turbulence, economic instability and geopolitical tension.
04:27 So that is why if you notice, FIs increase the gold purchase when the market is very volatile
04:34 and keep investing in a gold to edge against the other related turbulence in the market.
04:41 Okay. You're absolutely right about it. But if you come to Indian investors,
04:45 one thing that is observed is gold also has a cyclical demand and decline. So
04:52 what are some factors that investors should keep in mind when they're planning to invest in gold,
04:58 especially looking at the seasonal movements that take place?
05:02 You see, the one disadvantage in the gold is, gold, it cannot be ignored. That is a certain
05:09 limitation in the gold. Like gold cannot be, it cannot generate a cash or it cannot generate a
05:15 dividend, a cash flow regularly. Okay. But during the high inflation time, the global meltdown in
05:25 the equity market. So people will generally choose to invest in gold. And if you also look at it,
05:32 historical data shows since 1971, the price of gold has increased by a competent annual rate
05:38 of return at 7.65%. That is from 1971 till date, it's given a return of 7.65%. That shows
05:45 some time gold can beat the inflation. And that is where the Indian investor choose to invest
05:51 more money into gold. Okay. And they look at it as a multi-asset strategy to invest more into gold.
05:57 So looking at a multi-asset strategy, according to you, what is your advice? What is a component
06:03 that gold should have in that allocation? Generally, what these fund managers are doing is
06:07 they look at the market condition. Suppose, look at the market today, it's at 66,500 level. And
06:15 gold would be about say, per ounce is about 1,900 per dollar per ounce. So they will be
06:24 looking at this kind of market combination to look at gold as asset class to edge against the
06:31 one is the volatility, the other is an inflation. And normally during period like this, the
06:36 asset allocation towards the gold, the fund manager will be increasing somewhere around
06:41 35 to 40% and keep equities as asset class between 20, 25% and the balance into debt to provide
06:49 stability in the portfolio. Okay, fair enough. And you mentioned one very interesting point,
06:53 which is about gold and how it is a safe harbor when it comes to geopolitical issues,
06:58 which we have seen in the past several months. So how exactly can it help investors in protecting
07:06 the portfolio from global risk? And today, it's not just limited to global, global risks are not
07:12 limited only to geopolitical issues, it also spills over to climate change, and the various
07:17 calamities that is routed by climate change. How can gold be a hedging instrument against it?
07:25 See, normally, when it comes in the form of gold, when people are investing, they look at one as a
07:30 safe bet, because gold, they feel that it will not be related like equity market. And whenever
07:36 there's a turbulence or global market uncertainty, investors tend to increase the exposure towards
07:43 gold and reduce the equity exposure, so that it can edge against the inflation, or even if it is
07:51 a market turmoil, we continuously downward. They feel, we also tell investors to expose more into
07:58 gold or a multi asset funds, so that they can protect their principal and reduce exposure
08:06 into equities. So Mr. Biswas, those were the only questions that I had. Is there anything else that
08:11 you would like to tell investors when it comes to factoring in gold in their monthly asset allocation
08:17 or their multi asset strategy? Yeah, if you look at traditionally, Indians,
08:23 their favorite is one of the asset is gold. So gold should be part of their asset allocation.
08:29 And you look at any one of us today, we have gold as asset allocation, real estate as asset
08:36 allocation, equity as an asset allocation and the mutual fund as asset allocation. So combination of
08:42 all these four factors, it will definitely help investors to create wealth and to protect again,
08:48 against the inflation or a currency depreciation. One should have exposure into gold so that
08:53 the portfolio asset allocation will grow in such a way that irrespective of whatever is the market
08:59 condition, they will be making a close to double digit return or sometimes even 10 to 11% kind of
09:06 annualized return. Thank you so much for your time Mr. Biswas.
09:09 - Thank you. - Thank you.