Here is why asset allocation could have been a real help for you

To begin with, gold and global equities can be an interesting and profitable proposition for long term portfolios. After all, it is about asset allocation!

Oct 16, 2020 09:10 IST India Infoline News Service

When it comes to asset classes, we classify equity as high return / high risk and debt as low return / low risk. Gold is viewed as an asset class that hardly gives worthwhile returns over time. While international equities are occasionally used by Indian investors, nobody looks at it as a serious asset class.

How have these asset classes performed over last 17 years. What is the logic of 17 years? We are considering 2003 as the base year for a number of reasons. The year 2003, was the bottom of the multi-year bull market and the Sensex and Nifty have grown 15 times since. In the case of gold and debt, this period captures multiple cycles of global price movements and domestic interest rates.

Asset class performance over different periods
The table below captures the performance of 5 distinct asset classes in India over different time frames. Let us first capture returns if a lump-sum was invested in these assets.
Asset Class 17-Year Returns (%) 13-Year Returns (%) 09-Year Returns (%) 05-Year Returns (%) 01-Year Returns (%)
Equity Fund 14.14% 8.02% 6.56% 5.77% 2.61%
Debt Fund 7.41% 8.24% 8.69% 8.52% 10.35%
Gold 13.11% 12.90% 9.18% 12.31% 34.89%
FDs 7.10% 7.54% 7.63% 6.87% 6.29%
Global Equity 10.54% 10.84% 16.89% 12.73% 25.57%
Data Source: AMFI / RBI

A couple of interesting points emerge from the lump-sum simulation. Firstly, equity would have given best returns if you had invested at the bottom in 2003. Otherwise, the returns would have been far from impressive. Debt and FDs are relatively stable, although yields on debt funds have been better in recent time due to falling interest rates.

The surprise package was gold and, to an extent, global equities, which have done extremely well in the last 1 year due to COVID-related liquidity impact. But the surprising fact is that gold has done very well even over a 17 years period and returns are just 100 bps lower than equity. Over shorter periods, gold and global equities have clearly outperformed equity funds. How would this change if we opted for a SIP instead of lump-sum?

Would a SIP have changed asset returns?

In the first instance we assume a lump-sum investment in each asset class for different time frames. Now we assume a monthly SIP, instead. Look at the return charts.
Asset Class 17-Year Returns (%) 13-Year Returns (%) 09-Year Returns (%) 05-Year Returns (%) 01-Year Returns (%)
Equity Fund 10.72% 8.36% 8.20% 6.19% 4.65%
Debt Fund 8.11% 8.48% 8.75% 8.71% 10.54%
Gold 12.76% 11.59% 11.18% 18.14% 37.98%
FDs 7.33% 7.36 7.15 6.55% 6.05%
Global Assets 12.74% 14.99% 15.97% 15.51% 25.07%
Data Source: AMFI / RBI

If you look at SIPs, the benefit to equities has been quite limited in the above two comparisons but it is gold and global equity that benefited the most. For example, when a SIP is considered, gold and global equities outperformed equity funds over a 17 year period. How do we apply these insights?

Time for greater emphasis on asset allocation

One of the key takeaways from the above analyses is that the focus has to now shift to asset allocation. Focusing on traditional equity and debt was good but from a more practical standpoint, it is essential to spread your money across more asset classes. The reasons are not far to seek. With central banks unlikely to reduce the liquidity any time soon, asset inflation will sustain. That is good news for global equities and when it is combined with global uncertainty, it is great news for gold. It is time to rethink asset allocation for the future.

Conservative Approach: 60:20:10:10

We are talking about an allocation of 60% to equities, 20% to debt and 10% each to gold and global equities. If you had started this mix in 2003, then over the last 17 years, your portfolio SIP would have yielded 10.72% returns. That would be better than debt funds and FD and at par with pure equity funds. But you are achieving similar returns as equity with a diversified portfolio and lower risk.

Aggressive Approach: 50:20:15:15

It is always better to limit gold and global equities to a peak level of 15%. In this case, your portfolio return would have been slightly better at 10.95%. The moral of the story is that adding gold and global equities to your portfolio is more important than how much you add.

It is about the future, not about the past

These are past returns and, hence, indicative. We are entering a situation where gold could remain a safe haven of choice and global equities could continue to selectively rally notwithstanding macroeconomic dichotomies. The best answer for an investor is to diversify across more asset classes. To begin with, gold and global equities can be an interesting and profitable proposition for long term portfolios. After all, it is about asset allocation!

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