Asset Allocation Strategies for PMS Investors
Investing in PMS is simple; it is the journey thatneeds constant supervision. Of course, there are PMS companies & fundmanagers that take care of portfolio management, but, as an investor, you needto stay informed about the allocation and diversification part. PMS is not ascomplex as people think. With the help of PMS managers, navigating through PMSis seamless.
If you approach a PMS company, you can choose fromvarious portfolio options, namely, discretionary, non-discretionary, andadvisory. As an investor, if you choose a discretionary PMS, the fund managerwill take care of your investments and profile. Even if you are unavailable,the fund manager will manage your portfolio, i.e., without your approval.
If you choose non-discretionary PMS, the fund managerwill seek your approval before every buy & sell. Meaning, your approval isessential for a fund manager to make a trading deal. Without your approval, thefund manager won't trade in stocks or funds.
You can choose advisory PMS - if you want guidance inthe PMS investment cycle. Meaning, you know about trading and stocks, but stillwish to know about the funds that’ll perform well.
The most important aspect of PMS is asset allocation,& we’ll discuss this topic today. As an investor, you must know about assetallocation so that you make informed choices.
What is An Asset Allocation Strategy?
Asset allocation in PMS customizes exposure acrossdifferent securities, equity, debt, and other alternatives to balance high-riskand high-reward goals. PMS is unlike mutual funds, where allocation anddiversification take the center stage, so that the portfolio remains on track.
There are many kinds of assetallocation strategies, such as dynamic allocation, strategic shift, andtactical approach.
Dynamic allocation is based on market cycles.Strategic allocation follows a buy-and-hold policy, and tactical allocation ismeant for long-term gains. All these strategies are typically managed throughmulti-asset PMS platforms. Let's discuss the asset allocation strategies indetail.
Dynamic Asset Allocation
Dynamic asset allocation is an active investmentstrategy that shifts the portfolio weights between debt & equity based onmarket conditions. Meaning, it moves from zero to 100 % depending onallocation.
As such, dynamic asset allocation aims to reducedownside risk by increasing equity during the correction period. Unlike thepassive strategy, here managers adapt to asset mix to capitalize on differentmarket opportunities.
Also, the primary approach here seeks to limit thedrawdowns and protect the capital, making it more suitable for moderate-riskinvestors. Dynamic asset allocation operates with high flexibility, making it apreferred choice for the fund managers.
Strategic Asset Allocation
Strategic allocation in PMS refers to a long-term PMSapproach that sets different targets based on allocations across various assetclasses like gold, debt, and equity.
Ideally, this can also be based on risk profile, timehorizon & specific investor goals. Here, a long-term disciplined approachsets a fixed percentage to target assets.
In most cases, it is 70 percent equity and 30 percentdebt. Well, this helps in rebalancing, which periodically reduces market risks.Strategic asset allocation is designed for the long term, ignoring theshort-term market noise. The best part about the approach is that it helpscushion the portfolio against market downturns & drifts. Strategicallocation is a vital part of asset allocation in PMS.
Tactical Asset Allocation
Tactical asset allocation is an active and short-termapproach that shifts the asset mixes between equity, cash, and debt. The assetallocation strategy aims to capitalize on market trends & economicconditions.
Unlike other fixed allocations, this one allows thefund managers to overweight or underweight different sectors to enhancereturns. Most PMS managers use tactical asset allocation to exploit variousmarket inefficiencies, making adjustments to the portfolio rather thanfollowing a fixed plan.
The key feature of tactical asset allocation is toimprove risk-adjusted returns by capturing short-term upsides while mitigatingmarket risks.
Insured Asset Allocation
In insured asset allocation, you can establish a baseportfolio value under which the portfolio should not be allowed to drop. Thevalue is typically set by the fund managers so that the portfolio remainswell-aligned.
As long as the portfolio achieves a return above thebase, fund managers exercise active management based on forecasts &judgment, and rely on analytical returns.
However, if the portfolio ever drops to the basevalue, the fund manager invests in risk-free assets, so that the base valuebecomes fixed. This strategy is most suitable for risk-averse investors whoseek to create long-term capital gains.
Constant Weight Asset Allocation
Constant means fixed, which means the strategymaintains a fixed percentage of asset classes. Fund managers maintain a fixedpercentage of 60 percent equity and 40 percent debt. This is done throughregular rebalancing when the weights drift more than 5%. Most PMS companiesalso use the buy low & sell high approach, which reduces risk and ensuresconsistent returns, making it useful for disciplined portfolio management.
The primary aim of this approach is to maintain aspecific risk profile rather than following market movements. Also, thisapproach is more suitable for traditional investors investing in PMS.
Multi-asset Allocation
Multi-asset allocation involves investing in threedifferent classes, such as debt, equity, and commodities. This asset allocationaims to optimise the asset classes and reduce the volatility associated withinvesting.
The fund manager follows the approach by blendinguncorrelated assets. Also, these portfolios mitigate market risks that areassociated with downturns in a single asset class.
Basically, the approach is to safeguard the investoragainst market downturns. These strategies are categorized as balanced,conservative, and aggressive. It is more suitable for investors who need adiversified exploration of over three to five years.
Key Factors That Influence Asset Allocation:
There are many factors that influence assetallocation. As an investor, you must know about these factors.
Investors Age
Most PMS companies or fund managers consider the ageof the investor as a factor for risk-taking. Of course, younger investors canafford to take more risks compared to older ones. Younger investors have alonger time horizon, so risk-taking capacity is good. A fund manager canallocate assets based on the age factor.
Risk Tolerance
Risk tolerance is an important aspect of assetallocation. An investor's risk appetite plays a key role in determining theasset mix in a portfolio. Notably, risk-averse investors prefer a higherallocation of debt securities while aggressive investors are more inclinedtowards equities.
If you’re a first-time investor, then the PMS companywill consider your time horizon and risk-taking capacity. Of course, noteveryone is prepared for asset allocation in a diversified way.
Let's Take a Look at Various Asset Classes for AssetAllocation,
For equities and stocks , the risklevel is on the higher side, but the potential for returns is also high. Thestability is for the short-term, but in the long term, you can expect goodreturns on investments.
For debt securities, you can expect moderate or low risks; thepotential returns are steady & stable. If you are looking for completestability and reliability, you can trust the option. Even during market downturns,you can expect good returns on investments. Most fund managers choose to investin debt securities as a feasible option.
For gold investments, you can expect moderate risk. The gold pricesremain uncertain, so the risks can also be on the higher side. Additionally,gold can serve as a hedge against market volatility in most portfolios. Thereturns are relatively stable compared to other risky investment options. Thatsaid, it also acts as a haven during uncertainty, typically hedging againstinflation.
International equities can offer high to moderate risk. However, therisk can vary depending on the region or country. The investment type offersexposure to global markets, which is a plus. It also hedges against country-specificrisks.
Benefits of Asset Allocation:
Asset allocation allows for complete diversificationacross various asset classes, which helps to mitigate market risks. Instead ofinvesting in a single asset class or mutual funds, investors can place theirbets on different asset classes to get good returns.
Also, by spreading investments across various assetclasses, the fund managers can cushion the impact of market volatility to anextent. As you know, markets are uncertain, so if there is something that cansafeguard your portfolio, it is asset allocation. By investing in a diverserange of assets, investors can enhance their potential for higher returns.
Conclusion
Asset allocation is the best strategy for PMSinvestors. Fund managers are aware of this fact, which is why they concentrateon the allocation part more than other aspects.
Apart from reducing the investment risk, it helpsmanage market volatility. A diversified asset mix can cushion against differentmarket risks, which can benefit investors.
Asset allocation approach ensures better portfoliostability and enhances long-term returns. As an investor, if you are eyeinglong-term wealth creation, asset allocation & diversification areimportant.
Lastly, it helps to align investment goals withfinancial goals, ensuring complete peace of mind. Asset allocation improvesdiscipline & avoids emotional investing.
