The active funds versus passive funds debate refuses to die down. In the past 6-8 months, I’ve come across a few reports and articles published by the media questioning the efficacy of actively managed equity funds. Besides, against the backdrop of several Index Funds being launched in the last few months, I even heard some experts playing up the tune of passive funds.

Are passively managed Index Funds the apt fit to generate wealth? Let’s find out…

Well, first understand that the performance of active equity funds and Index Funds could vary depending on the type of scheme, the benchmark it tracks, and the timeframe you select.

If assessed over the last one year, surely certain sub-categories of actively managed equity mutual funds — like Large cap Funds, Large & Midcap Funds, Multi-cap Funds, Flexi-cap Funds, and ELSS — have underperformed the Nifty 50 Index Funds, the BSE Sensex Index Funds and the Nifty 100 Index Funds as well as the benchmark indices (see Table 1).

Only Value Funds and Contra Funds (which follow certain value investing principles) have fared better than index funds and benchmark indices, yielding value for you, the investor, in the last one year.

Table 1: Performance of various mutual fund categories across the timeframes

As per SPIVA analysis as of June 2022, the percentage of actively managed equity schemes underperforming their respective benchmarks varied between 27%-90% on 1-year returns, depending on their market capitalization bias.

In my view, an active equity mutual fund scheme’s performance cannot be evaluated by looking at short-term returns, irrespective of whether a Large Cap Fund, Large & Mid Cap Fund, or any other sub-category of equity scheme.

A longer period of performance, i.e., over 3 years, 5 years, 7 years, or more, gives a better sense of how an actively managed equity mutual fund scheme fares across market cycles or phases. The SPIVA study also reveals that over the longer time frames (3 years, 5 years, and 10 years), the proportion of underperformance of the actively managed equity schemes is lower.

Thus, only when the CAGR returns across market phases or cycles are remarkably low than the category peers, Index Funds, and the benchmark index, the actively managed equity mutual fund scheme may be given a miss. Keep in mind that it is not that all active equity funds are bad or should be given a miss. Some actively managed equity funds have generated alpha, i.e., outperformed their respective benchmarks and Index Funds. What matters is prudent fund selection if you are looking to generate wealth.

Enterprises, which replaced Shree Cements in the Nifty 50 Index in September 2022. Adani Enterprises is estimated to have witnessed USD 335 million in inflows when it was added But still, the question remains: Why did passively managed Index Funds outperform?

It might sound ironic, but passive funds aren’t really passive these days. This is because their underlying indices witness a high churn these days. In other words, the constituents or the companies forming a part of the index are removed and replaced with some other quite often.

The primary criteria for inclusion in the Nifty 50 Index are:

• Average free-float market capitalisation should be at least 1.5 times the average free-float market capitalisation of the smallest index component.
• The average impact cost of the security should be a maximum of 0.5% for the last six months on 90% trading instances for a portfolio value of Rs 10 crore.

Up to 5 companies can be replaced/added in a calendar year.

Given the market movement in the last couple of years, any stock in the Nifty Next 50 Index, which has a high free-float market capitalisation and has done exceptionally well in the recent past, has become a potential candidate for inclusion in the Nifty 50 Index, especially, when it can easily satisfy the liquidity criterion. Take the example of Adani to the Nifty 50 Index in September 2022 (and the average annual return of Adani Enterprises in the past 3 years has been 165%).

But what about valuations, rising debt on the balance sheet, and corporate governance issues that may have deterred a vast majority of active equity fund managers from investing in Adani Enterprises? In my view, adding such companies to a portfolio is always a tough call for any fund manager of an actively managed equity fund.

When such stocks are added to major indices and sentiments are upbeat, their movement becomes further skewed on the upside. And in such a case, if an actively managed equity scheme does not own such a stock — because it does not fit in the quantitative and qualitative parameters of the active fund manager — it could weigh down on the returns of the scheme.

What’s more amusing is Shree Cement replaced Yes Bank in March 2020, and the former’s tryst with the Nifty 50 Index came to an end in just two-and-half years with Adani Enterprises making its debut in the Nifty 50 Index.

Another reason why active fund managers struggled to match the performance of passive funds lately is the dominant weight of select stocks in the leading indices. Between December 2019 and December 2022, the weight of Reliance Industries Ltd. in Nifty 50 jumped from around 8.6% to almost 11%. Active equity fund managers tend to prune single stock exposures when they near the 10% mark, whereas an Index Fund can remain passive and follow the weightage of the underlying benchmark index.

On the flip side, a noticeable underperformance of some of the index-heavy private sector financial stocks negatively affected the performance of active funds betting big on them. For instance, HDFC Bank, HDFC Ltd., and Kotak Mahindra Bank, amongst others, witnessed erosion in their index weight. Historically, these banks have delivered consistent business growth, and their asset quality has been stable too. But taking a low risk in a high-risk environment could result in underperformance.

Similarly, in the S&P BSE 500 Index, 3 of the top 10 performers in 2022 were Adani group companies: Adani Power, Adani Enterprises and Adani Total Gas. All of them are capital-intensive and subject to cyclicality.

Amongst 448 of the S&P BSE 500 companies that have been part of the index for the past three consecutive years, 161 companies generated appealing double-digit returns in the year 2022, while in the year 2021, the count of such companies was 322.

This broadly suggests broader markets have performed fairly well, but owing to the limitation of an active fund manager to hold the number of stocks in the portfolio, it may not have yielded much benefit to their active equity funds. Besides, amongst the index heavyweights, only a few stocks drove the market movement in 2022. Nevertheless, it helped the Indian market to outperform its global peers quite convincingly in 2022.

Another problem with frequent index churning is some sectors get heavily underrepresented, and when top performers replace laggards and cyclical stocks, the Price-to-Equity (PE) ratio of the index undergoes a change. For instance, Tata Consumer Products replaced GAIL in 2021 and Divis Labs replaced Bharti Infratel in September 2020—high P/E stocks replaced low P/E stocks.

Rejig in other indices has been more radical. The change in the eligibility criterion to be a part of an index, which allowed the inclusion of companies having a listing history of just one month, cleared the way for newly listed loss-making platform companies. Recently listed new-age platform companies such as One 97 Communications (Paytm), FSN E-commerce, and Zomato today have found a place in the Nifty Next 50 Index attributing to sky-high valuations. But since their listing, they have been falling relentlessly. Falling liquidity and the end of the lock-in period applicable to anchor investors affected have weighed down on their performance. Suddenly investors started fretting over the lack of profits, but the fact is, these companies were never making profits.

So, as elucidated above, there have been a variety of factors that have led to the underperformance of some of the actively managed equity mutual fund schemes in the last year.

In my view, fundamentally, investors who are happy with market returns may invest in passive funds. But if you wish to outperform the equity markets (the benchmark index returns), prefer actively managed equity funds. Over the long term (5 years and more), actively managed equity funds can generate alpha returns for you.

Factors that create alpha opportunities are:

• Efficiencies in portfolio management
• Asymmetry in the information available to different market participants
• Diverse interpretations of the information by different investors
• Investment processes and systems

With the advent of technology and sophisticated analytical tools available to investors, new developments get factored into stock prices really quickly. In a way, markets seem to have become more efficient nowadays. This is one of the fundamental reasons why I believe alpha opportunities have become few. Moreover, liquidity has become an even more critical aspect guiding the valuations rather than the other way around.

The entire story of P/E expansions that unfolded over the last 10-12 years despite weaker earnings, can be attributed to very high liquidity and ultra-low interest rates. During this time period, actively managed equity funds that cared about valuations and margin of safety over ‘growth’ have looked like underperformers.

That being said, certain actively managed equity funds may be holding a quality portfolio, but it is possible that the sector bets (due to cyclicality) may not have paid off. For instance, the larger IT companies and pharma didn’t move much in 2022, as they did in 2020 and 2021. So, those active equity funds with exposure to such companies lagged, while those who indulged in sector rotation and momentum play, fared better.

Likewise, active equity funds that stayed away from Initial Public Offers (IPOs) — perhaps finding valuations a concern — but the company listed at impressive listing gain and rally that continued during the initial days of listing, lost on to the opportunity. Also, the ones who participated in IPOs but had to live up to a post-listing loss took a hit.

Thus, the underperformance of some actively managed equity funds in the last one year shouldn’t be blamed entirely on the market dynamics. Some active fund managers grossly misread market conditions. They refrained from investing in value companies, avoided cyclical stocks entirely, failed to realize the opportunities in midcap IT companies, and missed rallies in PSUs. Additionally, specific biases of fund houses and fund managers could be one of the reasons for underperformance.

Also, the Index Funds with exposure to the laggards in the respective index, too have suffered. So, keep in mind, a passively managed Index Fund could also expose you to high risk as well.

The point is, it’s not that all active equity funds can create wealth for you, particularly in the short term. If you select active equity mutual fund schemes with robust stock selection methodologies, the potential to generate alpha, i.e., outperform the benchmark index (as well as Index Funds) is higher. Timely identifying and including businesses with quality management that can deliver growth with the best corporate governance practices can augur well for the performance of an active equity fund to generate superior returns over the long term. In Table 1 above, the 3 years+ returns of active equity funds across sub-categories have been quite appealing and better than the benchmark returns and Index Funds.

Here are a few rules to follow to select active equity mutual funds for alpha-boosting returns:

• The portfolio should be built with a time horizon of at least 5 years.
• Diversify across investment style and fund management.
• Each fund in the portfolio must be true to its investment style and mandate.
• The active equity funds are managed by experienced and competent fund managers and must belong to fund houses that have well-defined investment systems and processes in place.
• No two schemes must be managed by the same fund manager.
• There should be no more than two schemes from the same fund house in the portfolio.
• Each fund should have seen at least 3 market cycles of outperformance and has proven the ability to generate alpha over the market index.
• They are amongst the top scorers in their respective categories.

With optimum weightage to each quantitative and qualitative parameter, which we consider important in identifying fundamentally strong funds with the potential to generate alpha, this model helps to zero in on quality names that have the ability to generate alpha returns for investors over the long term (over 5 years).

Happy Investing!

Factor premiums are risk-adjusted returns that have a strong economic or behavioral rationale. The most common factors are value, momentum, quality, low volatility and size. Factor investing is done by designing a portfolio of stocks using parameters representing a particular factor. For example, one may use high sales to price or high earnings to price among others to buy value stocks. Similarly, each factor is represented by particular parameters. The benefit of factor-based portfolio construction is that one can back-test these rules over a long period of time going back many decades.

This helps in analyzing the robustness of the factor over various macros and micro cycles. Traditional discretionary fund involves relying on the expertise of the fund manager in picking stocks. For many traditional funds, one has to rely on the past track record of the manager for evaluation. It is often challenging to find enough funds with long track records for this purpose. Factors on the other hand can be easily back-tested over a very long period. On the other hand, the benefits of traditional investment methods are that an experienced manager can use various qualitative information in their portfolio construction that cannot be easily used in a factor-based model. Factor-based and traditional discretionary investing are complementary to each other. Any investor should evaluate to have both as part of their allocation.

What makes momentum investing viable?

Momentum factor is categorized as a behavioral factor which is measured using the change in the price of a stock over a period of time. A momentum portfolio selects stocks with higher total returns compared to their peers. The rationale behind momentum is that this upward or downward trend, driven by market sentiment, would continue for some more time and can be used to generate returns. It is one of the most robust factors which has proven successful globally and also in Indian markets. Even though the factor generates very high returns, it is combined with large draw-downs in bearish markets. But the high risk-adjusted returns provide investors with a strategy that should provide great wealth-creation opportunities over a longer period. For investors who may not like the high volatility of the momentum portfolio, it can be combined with other factors such as quality or value to reduce the drawdown effects because of the low correlation between factors.

How important is Factor investing amid high inflation?

Factor investing has a long history of being used in professional fund management over many decades, especially in the US. Academic research and backtesting have shown it to have worked over a century of available data. Even though factors are affected by macro events such as inflation, it is important to note that their risk-adjusted premiums are robust over the medium to longer term. This is why even though macro events might affect the returns in the short term, the viability of factor investing has survived many such market cycles. Also, not all factors are affected by the same macro event, so a multi-factor approach is advisable in case one wants to reduce the cyclicality of an individual factor return.

How the consistency of Factors relates to the World of Investing?

Each of the factor premiums exists because of robust economic or behavioral rationale. This premium has been shown to persist over the medium to long term across multiple geographies. But each individual factor behaves differently in various market cycles which makes a single factor cyclical in nature over the short term. The persistence of risk-adjusted return from factor investing has been proven to work across a long period not only through academic research and backtesting through historical data, but also through the robust live performance of factor-based funds globally and in India. Consistent and patient investment in factor based strategies has shown to be a great way of long term wealth creation. The rule based approach has the added advantage of providing transparency in the stock selection process and explanation for the return attribution of a portfolio which has been one of the biggest reasons for its success at both institutional and retail levels globally and increasing domestically as well.

Multi-Factor Investing

In cricket, the team’s overall composition frequently matters more than any one star player. And just like different players in the cricket team tend to have different phases of performance, individual factors can undergo prolonged underperformance with impatient investors running out of patience before reaping their benefits. Just as a team combines the individual strengths of its players, a multi-factor strategy has the potential to overcome the cyclicality of the factors combined.

A successful team in cricket is often about the composition of the team rather than the individual star player.

The relationship between single factor and multi-factor strategies is no different in this regard – the team is the combination of the individual factors into one multi-factor strategy. A factor can undergo prolonged periods of underperformance with disillusioned investors running out of patience before the benefit of exposure to that factor is reaped.

There is no right or wrong answer as to how many and which factors to include in a strategy, but all the benefits of diversification apply to factor investing as well. A multi-factor approach can offer diversification and smoothen the ride through the investment journey by harvesting multiple sources of returns.

The challenge of a multi-factor portfolio is to decide how many factors to include and what approach to take. The answers can be easily found in the investor preference and objectives themselves. Investors who prioritize returns over costs may prefer a portfolio strategy dominated by momentum, while those with a strong preference for stable, consistent returns may consider low volatility to be the foundation of their portfolio. When designing a strategy for an astute investor segment with higher risk tolerance, one may consider concentrated single factor strategies to be appropriate. On the other hand, when designing a strategy for a wide variety of investors, a multi-factor strategy may serve the purpose best.

• Source: NJ research, Bloomberg, National Stock Exchange
• Calculations are for the period Oct 2002 to Aug 2022.

• Source: NJ research, Bloomberg, National Stock Exchange
• Calculations are for the period Oct 2002 to Aug 2022.

• Source: NJ research, Bloomberg, National Stock Exchange
• 10-Yr CAGRs are calculated for the period 30 September 2002 to 31st August 2022 and have been rolled on a daily basis.

How multi- factor strategy can help in your portfolio construction?

Single factors as explained above, have high risk-adjusted returns along with higher volatility and cyclicality in their returns due to various macro business cycles. But the various factors also have a low correlation to each other given the diversity in the rationale for the persistence of their premiums. This low correlation provides the benefits of diversification when two or more factors are combined to achieve a much smoother risk-adjusted return, say for example by combining quality, value, low volatility and momentum. Factor strategy returns have shown to perform better than the market benchmark over the medium to longer term and should be an important wealth creation allocation for any investor.

What does “Blue-chip” denote and why such companies are preferred for Investment?

Companies with high and sustainable competitive advantages that protect their market share and profitability possess high MOAT and are referred to as “Blue-chip” or “Quality” companies.

Some names with which Indian stock market associates the notion of “Quality” are Asian Paints Ltd, Nestle Limited, Britannia Ltd, Hindustan Unilever ltd, Pidilite Industries, Bajaj Finance, HDFC Bank, Titan etc.

Fundamentally these companies have shown consistent Cashflow growth over the last 10-15 years. In terms of stock market performance, these “Quality companies” in times of market expansion have either yielded similar market returns or more and during consolidation these companies have fallen lesser than the market (assuming Nifty returns for illustrating market returns). In the last 10-15 years, the superior performances of these companies have been witnessed multiple times and hence the return matrix of these companies have imprinted on investors’ mind thus making them Investor favorites.

Under Performance by Quality Companies in Recent Times

In the recent times, post Covid lows in Mar 2020, there is a strange change of behavior of these quality companies price movement vis a vis market movement. The superior performance of quality companies that seemed as a rule of the market has been overruled by the markets. In the rally from Mar 2020 lows to Oct 2021 highs, these companies delivered more or less market returns however, during the decline from Oct 2021 highs to Jun 2022 lows, these companies have fallen “more” than the market unlike what was witnessed in earlier expansion and consolidation phases of the market.

Table of Returns for Quality Nifty Companies during Oct 2021 to Jun 2022

Factors Attributed to Quality Companies Recent Underperformance

Our studies show that this inferior performance has more to do with the investment opportunity becoming wider than before in Indian context. In times of benign corporate profit growth during the last 10 years, these companies continued exhibiting consistently high cash flow growth which kept shifting their valuation range to higher and higher trajectories. Going forward, a broad based earnings growth is expected from all sectors like Banking, IT, Pharma, Industrials, Energy, Discretionary etc. This has resulted in Valuation range of the favored stocks coming down one notch lower to 2016-2020 levels.

Some Examples of Quality Companies’ Valuation Re-basing

Is Quality Out of Fashion Now?

We believe the valuation range for Quality companies are settling by the process of mean reversion. In many stocks the reset has been already done while in some the process is still continuing. Quality is here to be. There are many opportunities in good quality companies that Investors have waited for years for making an entry. This era has to be utilized for the same. We assume, companies will rebase itself to previous valuation range and then react to earnings and cash flow for the new trajectory for prices. We have seen over a long term period, companies with high cash flow and sustainable high return ratios reward stock market investors.

Hence, the faith on quality stocks is maintained and this price correction is assumed to be a part of adjustment to normalcy. In the long term, Investors make money if they are associated to good quality companies and management. So, for some time these companies may go out of fashion, but for long term investment in “Quality is Forever.”

What is Asset Allocation?

Asset allocation means spreading your investments across various asset classes. Broadly speaking, that means a mix of stocks, bonds, and cash or money market securities.

The goal of allocating your assets is to minimize risk while meeting the level of return you expect. To achieve that goal, you need to know the risk-return characteristics of the various asset classes.

The figure below compares the risk and potential return of some of them:

Because each asset class has its own level of return and risk, investors should consider their risk tolerance, investment objectives, time horizon, and available money to invest as the basis for their asset composition. All of this is important as investors look to create their optimal portfolio.

Investors with a long time horizon and larger sums to invest may feel comfortable with high-risk, high-return options. Investors with smaller sums and shorter time spans may prefer low-risk, low-return allocations. The rule of thumb is that an investor should gradually reduce risk exposure over the years in order to reach retirement with a reasonable amount of money stashed in safe investments. This is why diversification through asset allocation is important

To make the asset allocation process easier for clients, many investment companies create a series of model portfolios, each comprised of different proportions of asset classes. Each portfolio satisfies a particular level of investor risk tolerance. In general, these model portfolios range from conservative to very aggressive.

Strategies for Asset Allocation based on Debt/Equity Proportion

A Conservative Portfolio

The main goal of a conservative portfolio is to protect the principal value of your portfolio. That’s why these models are often referred to as capital preservation portfolios. Even if you are very conservative and are tempted to avoid the stock market entirely, some exposure to stocks can help offset inflation. You can invest the equity portion in high-quality blue-chip companies or an index fund.

A Moderately Conservative Portfolio

A moderately conservative portfolio works for the investor who wishes to preserve most of the portfolio’s total value but is willing to take on some risk for inflation protection. A common strategy within this risk level is called current income. With this strategy, you choose securities that pay a high level of dividends or coupon payments.

A Moderately Aggressive Portfolio

Moderately aggressive model portfolios are often referred to as balanced portfolios because the asset composition is divided almost equally between fixed-income securities and equities. The balance is between growth and income. Because moderately aggressive portfolios have a higher level of risk than conservative portfolios, this strategy is best for investors with a longer time horizon (generally more than five years) and a medium level of risk tolerance.

An Aggressive Portfolio

Aggressive portfolios mainly consist of equities, so their value can fluctuate widely from day to day. If you have an aggressive portfolio, your main goal is to achieve long-term growth of capital. The strategy of an aggressive portfolio is often called a capital growth strategy. To provide diversification, investors with aggressive portfolios usually add some fixed-income securities.

A Very Aggressive Portfolio

Very aggressive portfolios consist almost entirely of stocks. With a very aggressive portfolio, your goal is strong capital growth over a long-time horizon. Because these portfolios carry considerable risk, the value of the portfolio will vary widely in the short term.

Maintaining Your Portfolio

As you decide how to allocate your portfolio, you might choose one of several basic allocation strategies. Each offers a different approach based on the investor’s time frame, goals, and risk tolerance.

When your portfolio is up, it’s important to conduct a periodic review. That includes a consideration of how your life and your financial needs have changed. Consider whether it’s time to change the weighting of your assets.

Even if your priorities haven’t changed, you may find that your portfolio needs to be rebalanced. That is, if a moderately aggressive portfolio racked up a lot of gains from stocks recently, you might move some of that profit into safer money market investments.

The Bottom Line

Asset allocation is a fundamental investing principle that helps investors maximize profits while minimizing risk. The different asset allocation strategies described above cover a wide range of investment styles, accommodating varying risk tolerance, time frames, and goals.

When you’ve chosen an asset allocation strategy that’s right for you, remember to review your portfolio periodically to ensure that you’re maintaining your intended allocation and are still on track for your long-term investment goals.

Concluding View

We apply air bags, disc brakes or EBD to a racer car. These features will enhance the confidence of a driver to drive the car at a high speed but with good confidence to control the car.

In a same way, intention of doing Asset allocation & its periodic review is to minimize the investment portfolio risk. It is never intended to enhance the returns. Investor and advisor must be very clear of its possible outcomes when you opt for Asset allocation strategy.

No Asset allocation strategy can be a winner (best return generator) in all market conditions. It will allow intended risk/return experience during the journey of an investment.

Every person has some financial goals like retirement, medical plan, child’s education, travelling, getting a new house, car, etc. Please refer to the below image:

As can be seen above, every individual has limited earning life (Phase II) and has financial goals to achieve from birth till the end of life.

Every person has a surplus income during his/her earning life and looks for investment options where he/she can park his money.

Among various investment options, Fixed Income options were the most popular ones in the last 50 years. FD, Bonds, Debentures, LIC, PPF or Post Office saving schemes are a part of the Fixed Income asset class. Capital protection and Fixed Income is the most loved feature enjoyed by most Indian investors till now.

Post Liberalization of the Indian economy in 1991, things started changing. After 1991, the Economy which was in the doldrums started to take baby steps. The speed of improvement was slow from 1991 till 2003. Post that liberalization started showing its results and the Indian economy started showing visible improvements. The effect of this was a significant reduction in Interest rate. On one hand it helped many Indian entrepreneurs to raise cheap capital for their ventures, but on the other hand reduced Fixed Interest to the Savers.

India’s long term Inflation average is around 6.5%. We know that each asset class returns must beat Inflation in order to remain attractive in a long run. As can be seen in the image below, post 2003 the Fixed Interest returns diminished and started kissing the inflation or lately now have even started to even underperform. Long term returns of different investment avenues above the dotted line of average inflation can be observed below.

In the situation where most loved Fixed Income products started underperforming Inflation for a long time, the Investors had no option but to look for other investment classes at the cost of increased risk. Gold & Real Estate offered a small overperformance over Inflation.

Gold & Real Estate offered a small over performance over Inflation. But at the same time had some disadvantages such as low liquidity, physical nature & a large ticket size with storage or maintenance cost.

Equity / Stock Markets, on the other hand, had a significant overperformance compared to Inflation but it is a very volatile asset class as per the popular perception of a common man. We can see the typical returns below:

On a closer look & data crunching, the Equity asset class in the short term looked to be extremely volatile & unreliable, was not that volatile or unreliable in horizons of 5 years or above. So, investors who were ready to park their surplus funds for a long term started understanding this asset class.

Also, the introduction of managed products in the Equity asset class such as Mutual Funds or PMS during the period 1996 to 2000 allowed an entry of common investors to park their surplus money. By 2010, many investors and analysts had understood that Mutual Funds were a less volatile & professionally managed version of Equity investment that gave significantly higher returns compared to all other asset classes in the long run.

Investors realized and adjusted to the nature of equity over some time. They realized that equity has the following features:

• Equity can significantly beat Inflation in the long term
• Equity provides higher liquidity compared to most other asset class
• Equity is the most efficient asset class in India

But it also must be taken into consideration that:

• Different asset classes Outperform / Underperform each other in different market cycles.
• .Investors also have requirements for their surplus in the short term

The above facts also warrant that a proper Asset Allocation is required when it comes to parking your total investible surplus. The following must be considered while doing Asset Allocation:

• Risks & Rewards are interrelated i.e. Higher returns, higher the risk
• Asset Allocation protects from the vagaries of the market
• Situations in life can be unpredictable and liquidity is extremely important
• Asset allocation is different for different person

Portfolio adjustment as per risk bearing capability

Younger people who have time for an investment to grow and compound should have a major portion of their portfolio in equities (say 60-65%). While risk-averse and elder Investors should have more of debt, liquid assets and lesser equity (less than 30%) in their portfolio.

Key Takeaways

• Invest in equity to gain higher returns.
• Stay invested in equity for a longer period.
• For short term investments, prefer FDs, Bonds and Liquid assets.
• The portfolio should be well-diversified and at the same time have assets that can meet financial goals.
• Equity investment should also consider the risk-taking ability of the investor.