Brexit – How to protect your Mutual Funds Portfolio
Time and again, turbulence in the stock market have reinforced the importance of Asset Allocation. The equity markets were on a roll post the Union budget in February this year. With NIFTY rising by up to 21 percent, investors promptly made an exit from gold and other hedging instruments and began to invest aggressively in Equities. When Brexit hit on 23rd June 2016, the market sentiments turned pale and gold began to glitter once again.
‘Brexit’ refers to Britain’s exit from the European Union. As a response to the historic referendum, the pound fell to its biggest low since 1985, sending shock waves through the global economy. As a result, the following Friday, NIFTY fell by 2.2 percent (182 points), while the value of gold rose by 5 percent. So, let’s say an investor has Rs.1 crore portfolio with 50 percent allocated to equities, 50 percent in debt and zero in gold. When stock indices witness an upward surge, his asset allocation can rise up to an additional 10 percent. If he does not reduce the equity exposure back to 50 percent, the sharp dip in equities as a result of events like Brexit can slash the value of his portfolio. Thus it is important to follow a proper asset allocation approach if you want to ensure that your portfolio is not impacted by market fluctuations.
Simply said, asset allocation is a strategy that maintains how your wealth will be allocated among various asset classes like equities, debt, real estate and gold. Asset allocation is determined by one’s goals, risk appetite and life style. The investor should stick to the strategy and invest in a disciplined manner. Asset allocations vary from individual to individual depending on how he or she would like to shape her investment strategy in line with her goals.
Asset allocation is especially important for a HNI (High Net Worth Individual) because events like Brexit can wreak havoc with one’s portfolio. It is essential for investors to review their portfolio once every month. Asset allocation is based on the concept that different assets can perform well at various points of time; so it is important to maximize the returns and cushion the losses. At the same time, we do not know which asset class can go up in value and which can crash. Since it is difficult to time the market, the best thing is to play by the basics, which is sticking the recommended asset allocation so that you get the best risk-adjusted earnings. It has been proved that close to 91 percent of wealth is earned on a long-term basis through the process of proper asset allocation.
Enjoy safe and steady wealth creation!!