Two kinds of allocation

When it comes to mutual fund investing, one of the problems that most of us create for ourselves is that we think that choosing a fund is the most important part. In fact, not just the most important but the part that must be done first. The entire activity of mutual fund investing gets reduced to choosing funds. Unfortunately, this sets us up for failure, and if it does get success, then that success is accidental and we don't actually know why and how we succeeded. It's just luck.

This odd obsession with the irrelevant parts of investing leads us to give undue attention to the parts of our investments that can play only a small or an irrelevant role. Some months ago, I saw this funny clip from a Jerry Seinfeld comedy show that made me think of this problem in investing. Here's what Seinfeld says, "Sky-diving was definitely the scariest thing that I've ever done. Let me ask this question from the people who do sky-diving. What is the point of the helmet in sky-diving?" So, if you dive from the plane and the parachute does not open, how exactly does the helmet help? It's funny, and as far as I can think of mutual fund investing, it definitely has a parallel and that parallel is asset allocation.

To be a successful investor, there must be a match between asset allocation and 'attention allocation'. And by 'successful', I mean being able to meet your life's financial goals.

As a reader of Value Research publications, you must have heard about asset allocation often, but 'attention allocation' may be a new concept for you. Let me explain. Your asset allocation is of course the proportion of money that you might have in different asset classes, whether directly or through mutual funds, like equity, FDs, gold, real estate, PF, etc. Your attention-allocation pattern is the amount of thinking and worrying you do about each. As far as I have observed, for a good majority of Indians, equity (both direct and equity-based mutual funds) gets an undersized asset allocation and an oversized attention allocation.

A typical case is an old acquaintance who will be retiring in a few years and came to me for financial advice. He was completely focused on choosing and optimising the equity funds that he was invested in. When I quizzed him closely, it turned out that some three-fourth of his investment portfolio, amounting to well over a crore of rupees, was in fixed income, spread between PF and various fixed deposits. And I'm counting only financial assets for the moment, ignoring the apartment he owns.

Another, even more typical case is that of an investor who wrote in to the 'Ask Value Research' feature on Value Research Online. His total assets include about Rs 6.8 lakh in equity mutual funds, about Rs 74 lakh in fixed deposits, and almost Rs 2 crore in real estate. However, the worries he recounted and the advice he was seeking was entirely centred on the equity funds, which added up to a grand total of roughly 4 per cent of his net worth. Whatever optimisation he could possibly do to his equity exposure wouldn't add up to anything significant - he could switch from the very best funds to the very worst (or vice-versa) and it wouldn't have a noticeable effect on his net worth.

These sound like extreme examples but in my experience, they are fairly mainstream. Most Indians who have any equity exposure are doing something similar. In a way, this is an understandable attitude. Equity-based investing does lend itself to more activity. There is a continuous flow of information and almost continuous liquidity for equity-based investments.

If you do an audit of your own asset allocation and attention allocation, you'll probably find the same pattern of worrying too much about too little. The question is, how are you going to do this audit so that the two start matching? And the answer is Value Research Online Premium.

Of course, for the last two decades, the plain version of Value Research Online has had the capability of showing you the equity vs fixed-income breakup of your fund and stock investments. However, Premium takes this much further by giving you the capability of doing a three-way match:

• Your actual asset allocation
• Your ideal asset allocation, as it should be according to your goals and therefore...
• Your attention allocation!

This ensures that the reality of where you are going and the temptation of paying too much attention to the interesting parts of your allocation stay in sync.

Asset allocation is only one aspect of Value Research Online - the service can take you far beyond the core capabilities that have always been there on Value Research Online. The very reason for creating Premium is that for many years now, I have observed that for a certain proportion of our members, the core set of capabilities are not enough.

You should look at getting a Premium membership, if:

• You want to make sure that your life's financial goals are achieved,
• You want to make sure that your mutual fund investments will ensure that these goals are achieved, and
• You do not have the time to do all the background work to do this yourself.

The correct 'attention allocation' is just one of the things that we can do for you; what will actually happen is the attainment of your life's financial goals.