Capital choreography

In the third week of June 2023, the Sensex hit an all-time high, garnering significant coverage in newspapers and social media channels. Bull markets are happy times as equity investments swell up, increasing net worth and instilling a sense of satisfaction. But what gets YOU rich? Is it just the rising equity markets? Clearly, no. Getting rich is a factor of your temperament and asset allocation. It is the percentage of investment in equity in your total portfolio. Case of Aman and Rahul In this article, we will discuss the impact of asset allocation using the example of two friends - Aman and Rahul. Let's consider a hypothetical scenario where the stock market doubles and halves from the assumed present level. Assuming stable debt returns (although they are volatile too, albeit lesser), both Aman and Rahul start with a corpus of Rs 1 lakh. Aman invests 20 per cent in equity and the rest in debt, while Rahul reverses this ratio and invests 20 per cent in debt and the rest in equity. If the stock market indices double after one year, the value of equity investments also doubles. The impact of this will be felt more by Rahul, since his gains would be more than three times that of his friend, Aman. Conversely, adverse situations, like a COVID-like scenario, can impact the equity market negatively. Assuming the market value halves, Rahul would suffer eight times more losses compared to Aman. Markets at 60000 Aman Rahul Total corpus (Rs) 100000 100000 Asset allocation Equity (%) 20 80 Debt (%) @7% 80 20 Amount (Rs) Equity 20000

This article was originally published on August 11, 2023.