One of the most important aspects of successful retirement planning is the right allocation of assets across different classes, primarily between equity & debt.
In principle, this looks very simple and is guided by a key factor: Risk Management. Equity investments carry a higher risk-reward ratio. While that is important for wealth appreciation, debt investments are equally important because they allow for capital protection and help reduce risk.
For the most part, there is an oversimplified version of debt-equity allocation which is tied to a singular factor – AGE. There are various approaches to risk allocation between equity & debt based on age. One fairly prominent one is the Thumb Rule of 100 according to which, you basically subtract your current age from 100 and that gives you the % allocation towards equity.
For instance, if you are 30, the rule suggests you can allocate 70% of your capital to equity and the rest 30% to debt.
Barring individual needs and specific conditions, this rule works fairly well in theory and is a good starting point for someone who is just beginning to build their investment portfolio.
Evolution of Debt:Equity Allocation With Age & Time
However, the Thumb Rule of 100 also means that for every year that you age, your allocation needs to change accordingly.
For instance, if at 30 you started out with a 70:30 equity:debt portfolio, then by 35 it should be 65:35. This means that you have to constantly manage your portfolio allocation and move in and out of funds.
DIY Approach to Portfolio Management Is Both Cumbersome & Sub-Optimal
Now imagine if you had to look at your portfolio every year and make re-allocation adjustments across your equity and debt MFs. Not only is it hard to do but also requires significant effort. Additionally, making changes to your debt & equity investments without reading the market conditions can also make your portfolio sub-optimal and lacking in optimal returns.
Take for instance, just the year 2020-2021 as a timeline.
Let’s say in Jan 2020, you adjusted your portfolio based on your age profile to 70:30. Come March 2020, you would be looking at losing almost 50% of the value in your equity portfolio. Fair, if you didn’t sell and held through, by the time you came to Jan 2021 you would probably just look at adjusting it back to, say, 69:31.
However, look at the Nifty graph below to understand why this approach is significantly sub-optimal.
Source: Google Finance
Now imagine if you’d invested more in equity come March 2020, ignoring the Thumb Rule of 100. What if you continued to over-invest in equity all the way upto Jan 2021?
The returns would have been massive and you would have captured all the upside by changing your asset allocation. But then you ask: Isn’t it equally important to pick the right stocks to make the right returns?
A Dynamic Asset Allocation Fund To The Rescue
For those who don’t have the time to research and understand the right investments to make the most optimal equity:debt allocation, a dynamic asset allocation fund is the perfect investment vehicle to consider.
Aditya Birla Sun Life’s Balanced Advantage Fund – A Dynamic Asset Allocation Approach Factors In Optimal Equity Exposure
In principle, a hybrid or dynamic asset allocation fund, like the one by Aditya Birla Sun Life, has the flexibility to invest across equity & debt asset classes based on market conditions. It also provides investors with the peace of mind that their investment risk is managed in an optimal way by experts.
While a pure equity investment MF might be too risky for some, a balanced advantage fund helps investors with managing risk while having the upside of high returns through equity.
Why Does the Aditya Birla Sun Life Balanced Advantage Fund Score High For Me?
I did a detailed explanation of Aditya Birla Sun Life Balanced Advantage Fund a few days ago when I discovered the fund, so definitely check that out.
For me, the fund’s most salient feature is its ability to capitalize on the right market timing and the opportunity to go back and forth between aggressive equity exposure and vice versa. I also think it’s a very smart approach to making sectoral equity investment bets.
Buy Low, Sell High Approach
The fund’s history shows that they have not shied away from taking high risk positions as long as the stock prices are low. For instance, the fund took aggressive exposure to sectoral bets like Banking post the pandemic crash, despite the uncertainty in stock markets. However, this practical approach allowed them to pick up these valuable stocks at low prices and deliver great returns during the market recovery (which was led by Banking stocks).
Flexible & Smart Investment & Withdrawal Options
Not only does the Aditya Birla Sun Life Balanced Advantage Fund offer flexibility in investments through lumpsum and SIP approaches, it also offers a Smart Withdrawal facility. This makes it easy for folks to withdraw a certain portion of their investment at regular intervals in a tax-efficient manner.
In summary, while risk management is an extremely critical part of portfolio allocation, it does require a fair bit of knowledge & expertise to build a portfolio that manages not just risk but also has the potential for outsized returns.
For those that can’t find the time, the Aditya Birla Sun Life Balanced Advantage Fund might be worth looking into as a way to manage the portfolio allocation across equity & debt in a much smarter fashion.