The markets are correcting and that’s no news, but yes, we haven’t seen this sharp a downtrend is a while now. Since September 2024, the benchmark Nifty 50 has corrected roughly 13% (till 27^th Jan 2025). While the peak of the market was seen four months ago, it’s in recent days that we are seeing sharper single day falls. 

Three years ago in January 2022, the equity market benchmark had reached it’s then peak and corrected roughly 16%-17% over the next six months. Back in January 2020, the benchmark index reached it’s then peak and corrected roughly 38% in a matter of two odd months. Then of course there was January 2008, when the index saw it’s then peak and reached a bottom only after 14 odd months. 

January does seem to be a favoured month for market peaks, however, what is clear is that there is no telling in advance how long the correction might last. Plus, increased volatility comes with the territory. It’s this uncertainty in equity returns over shorter periods of time which necessitates a long term investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... strategy that focuses also on diversification along with inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More beating returns. 

The benefit of asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you...

Thought through asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... is one of the most effective ways to achieve diversification. First let’s explore how spreading your investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... across three basic assets, equity, bonds and gold can help. A quick look at the historical returns (table 1) of diversified equity funds compared to multi asset funds will show you that the fall in value for the latter is a lot more measured in recent months. Multi asset funds combine exposure to equity, bonds, commodities, cash and even some real estate (securitised) assets. While the asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... across funds is not uniform, it’s common to see around 50%-60% in equity, 15%-20% in bonds and the rest split in commodities (like gold) and cash. The cushion for portfolio returns comes from the latter three. For example, in the current market environment, the overall one year average return for the long duration bond fund category is around 10.5% and for gold funds is 27.5%; this tops many diversified equity fund category average returns for the same period (all data as on 27^th January, Valueresearchonline.com)

What we can also tell is that multi asset funds are able to deliver 12%-14% annualised return in the long run. This will not always beat long term equity return for the same period, especially mid and small returns, but it is a substantial gain if you are looking for inflationInflation is a common term thrown around in economics lessons and by politicians around election time. What it means in simple language is that prices of things you buy, stuff, keeps increasing every year. It happens because the economy in... More beating compounded returns with low volatility. Even this can suffer in the interim though if equity prices continue to move lower. Nevertheless, the fall will not be as steep as compared to pure diversified equity funds.

It’s not necessary that you take on portfolio diversification through multi asset funds and here as well, fund selection will be a task. In the last one year, the returns in this category of multi asset funds have ranged from -3% to 19%. 

You can always build your own multi asset combination using equity index funds, simple short term bond funds, liquid funds and some allocation to gold ETF.

Having a diversified portfolio can help cushion the equity drawdown in the short term. In the long run for optimal wealth creation you will need to add equity assets.

What is your optimal asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you...?

Now we come to the part about building a thought through asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you.... This relies heavily on your financial goals and goal time lines. If all your financial goals are to be achieved at least after five years, then you need a higher allocation to equity. If financial goals are concentrated in the near term, then you must reduce your reliance on equity assets. 

For investors who have a good visibility of income over the next few years, have covered their emergencies with adequate insurance and have say 6-12 months of expenses put aside in assets that protect capital, having 70%-80% allocated to equity would be normal, despite the volatility. Even if the market corrects sharply, there is no need to panic because the funds invested in equity are not for use in the foreseeable future. 

Secondly, if you know that you will need chunky money in the next 6-12 months, at least 60%-70% of that requirement should be kept once again in stable return assets and not equity. 

Investing too little in equity can pull down your long term return and investing too aggressively can harm your immediate goals and also unnerve you in times of sharp corrections. 

The asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... balance is yours to find. It’s important to have stable return assets like gold, bonds and cash in the portfolio, but you need to add some risk for superior long term returns too. While mid and small cap portfolios are very volatile and tend to correct a lot more sharply than other diversified funds in a down trend, their 5-10-15 year returns are also far superior as compared to large cap or flexi cap strategies. Thus, you cannot afford to stay out of those either. 

Pick your cushion, pick your risk and allocate as per your goals, then shut it and leave it till those goals are closer to completion. Market volatility and corrections won’t matter too much, it’s your reaction and subsequent action towards asset allocationAsset allocation is essentially an official term for what you intuitively know is a healthy investment practice. For starters most households are likely to own some property and gold. That is diversification in asset allocation. You allocate the money you... which will be the key determinant of your long term investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... return.