Indians are mostly known for their saving ability. They have their own favourites while investing their money. Some people prefer to invest most of their money in stocks while others prefer to invest in real estate or FD’s, while some others prefer to invest in gold. But is it advisable to put all your money in one single asset class? The obvious answer is “No”. Most of the time, there are no good returns on your investment, due to inflation and so there is no much wealth creation.
At times, you will be advised to put all your money in stocks with a simple reason that in the long run equities will outperform bonds and cash, therefore maximizing your returns. They will provide you with all the necessary historical data and research to substantiate their point of view. People easily accept these assertions without thinking much about the same. While the historical data may be true to some extent, there could be deeper ramifications that you are not aware off. People have lost their entire savings in stock market crashes.
The other thing is that it does not take care of Inflation and deflation. Smart investors hedge their protection to guard their portfolio against inflation and deflation which is unpredictable.
In India the asset allocation is mostly classified into equities, bonds, fixed income products and gold.
Historical data and research have shown that rarely all these four asset classes have risen or fallen together. In most of the cases we have seen that gold and bonds have remained flat. But when bonds have rallied equities did not perform etc.
When an investor chooses to invest in all these four asset classes appropriately, then he is dividing his risk and so would be able to reap some returns on the asset class which is soaring as compared to the other asset class which is flat.
For e.g., the super performance of real estate will compensate for the underperformance of equities.
In order to take care of this aspect, most of the mutual fund houses have also floated mutual fund schemes which invest across all the different asset classes. If you are not an experienced investor and want to invest your hard earned money, then it is advisable for you to go through these multi class mutual funds. In this case, you do not need to keep a tab on the market, the fund managers will do it for you.
The fund managers are experienced people who will work on the research data and will invest your funds collectively in the right combination of asset classes, depending upon their performance. For e.g., if debt rallies then the fund managers will invest in equity and vice versa. The funds also take advantage of the tax efficiencies by taking into consideration the tax sops for different asset classes. By going in for multiple asset allocation mutual funds, the funds get majority of the up side and the down side is largely reduced.
The other major problem is that most of the time, investors are influenced to invest in asset classes which are doing very well at that point in time.
They want to get into these asset classes and immediately earn superior returns. However that is a wrong way of investing. Once an asset has run up for a few months or a year, then the chances of the same asset class giving superior returns diminishes drastically.
The more diversified portfolio you have the less volatility it is subjected to in different market conditions. As the age old saying goes “Do not put all your eggs in one basket “. It is true and has wisdom in it.
For more information check out the following resource:
Fundamentals of Investing in Equities and Assets: That Create Wealth – Anubha Singhania – Buy here
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