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What is the importance of asset allocation in a volatile market?

Dhirendra Kumar highlights the benefits of deciding asset allocation

What is the importance of asset allocation in a volatile market situation like the one we are facing now? What would be an ideal asset allocation?
- Swami

The markets are always volatile. When the market goes up, people don't associate the word unpredictable with it. However, when it goes down, the same market is referred to as a volatile situation. But the markets are always volatile - they go up and down on a daily basis - and it's very difficult to make sense of it.

The only way to deal with it is having an asset allocation that too with a little longer periodicity, because as previously mentioned, it's difficult to make sense of the volatility on a daily or weekly basis. The purpose of an asset allocation is to decide the allocations to equity and debt to understand your comfort level.

Assuming that one has decided an asset allocation of investing in equal proportions towards equity and debt. Now when equity does well, your 50 per cent consequently rises to 55 per cent and when the market crashes, your 50 per cent reduces to 40 per cent. So, your allocation changes to say, 35:65. Now, this can be looked at as a disciplinary signal. Subsequently, one should move from fixed-income to equity to restore the original asset allocation. So, this asset allocation and rebalancing is the way to go. However, don't do it very often.

Having said that, there is no precise formula as to what is an ideal asset allocation, since it depends on several things like - your circumstances, the scale of your capital, etc. Take for example - if an experienced investor invests Rs 5 crore and it goes down by 10 per cent, he/she won't necessarily be upset. However, for someone with Rs 40 lakh, waiting for the first of every month to withdraw some amount of it, is bound to get more anxious. So, it's a combination of several things that drives your thinking.

To reiterate, there is no formula. But I would say that usually during retirement, the asset allocation can be about 50:50 into equity and debt or at least 35 should be in equity. However, in your accumulation phase, I feel it should be 75:25. So, there are different ways of looking at it. Find your comfort and there is no formula that any expert can provide you.

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