Asset Allocation and Portfolio Construction
Strategic versus tactical
Strategic asset allocation sets long-term policy weights from the risk profile and goals, and explains most of the variability in portfolio returns. Tactical allocation is a deliberate short-term tilt that must be justified and documented, not an excuse for chasing momentum.
Diversification and correlation
Combine assets whose returns are not perfectly correlated: equity, debt, gold, real estate and international exposure. Diversification reduces unsystematic risk but cannot remove market risk. Holding many overlapping funds creates concentration in disguise.
Construction rules
- Match the horizon of each goal with the assets funding it.
- Keep the emergency fund outside the investment portfolio.
- Set band-based or calendar rebalancing rules in advance.
- Control costs and taxes; turnover has a price.
- Cap single-issuer and single-sector exposure.
- De-risk on a glide path as the goal approaches.
Worked example
Rs 10,00,000 at 60/40 means equity Rs 6,00,000 and debt Rs 4,00,000. After a year equity rises 20 percent to Rs 7,20,000 and debt 5 percent to Rs 4,20,000, a total of Rs 11,40,000. The 60 percent target is Rs 6,84,000, so sell Rs 36,000 of equity and move it to debt. The client has just sold the winner and bought the laggard, which is exactly the discipline rebalancing imposes.
Traps
Treating rebalancing as market timing. Using one allocation for every goal. Ignoring liquidity and tax consequences of switching. Assuming more schemes means more diversification.