Asset Allocation

While I'm working on the revised checklist, I also thought that I should get my portfolio asset allocation right. In this short post, I try to pen down what would be my asset allocation strategy.

Since my human capital is "bond type', as I strongly believe that my job is reasonably secure, I must keep a large portion of my investments into stocks / equities. Hence, I plan to keep the following allocation

NOTE: I do not consider real estate as an investment right now, and hence I'll NOT count it in this allocation. Also, cash investments like providend funds are also kept aside from this asset allocation.

1) Set aside sufficient money for daily expenses, committed annual expenses and emergencies, maintained in savings bank account, apart from some money (encashable in 2-3 days) in liquid fund. This part of money is NOT for investment.

2) Remaining available funds are for long term investing and limited speculation. This is partitioned as

- At least 10% in fixed maturity bonds and balanced fund. I do not choose bank fixed deposits as I believe that the post tax return on these are disadvantageous and do not compensate positively for inflation. I plan to keep this part of investment in HDFC Prudence Fund, as it is a good balanced mutual fund and has performed well during deep market corrections.

- Up to 15% in commodity investments like GOLD and others.

- At least 60% in equity investments, most of which would be direct stock investments, while a small portion (mostly through SIP route) into healthy equity mutual funds. As I wrote earlier, these investments will be directed into the following mutual funds. Note that mutual fund investments will be increased only when there're little chances to directly invest into stocks.

Large Cap focussed

- Franklin India Bluechip Fund
- HDFC Top 200 Fund

Small / Mid cap focused

- DSP Blackrock Small & Mid-cap fund

- SBI emerging businesses fund

- Franklin India Prima Fund

Amongst the direct equity investments, the following allocation looks reasonable on the diversification and balancing front:

- At least 10% in High Divident Yielding (3-5% or higher dividend yield) stocks. These stocks will provide cushion to the equity portfolio. Some of the potential stocks in this category of watchlist are: 

• IL&FS Investment Managers (~7% dividend yield at CMP)

- Up to 30% in large, stable businesses (stalwarts) from which I expect to generate 30-50% return in not more than 2-3 years. I believe that these businesses are decent but would not be suited for a very long term investments, and when they fall due to some transient problems, they can be picked up for decent returns. Some of these in my portfolio / watchlist are

• Infosys
• Possibly BHEL & Crompton Greaves, but these two would also fit into the next category

- Up to 5% in speculative bets / sin stocks. These will help fulfill the human desire to speculate, and also occasionally make some money. But again, here too, the main driving principle will be to protect the capital. Here, I'll take help from my brother who studies and practices technical analysis, or bet on some stocks where I feel risk / reward ratio is highly favourable.

- Remaining investments into Turnaround and long term stories. By turnaround, I mean businesses which are sufferring some structural problems right now (like an evolving industry or the business is transforming), but the long term prospects look good and I have the conviction to hold them for a long period of time, expecting to generate multi-bagger returns. Some of the investments in this category are:

• Piramal Enterprises
• Bharti Airtel
• CARE ratings
• MCX India
• Amara Raja Batteries
• Possibly BHEL & Crompton Greaves, but there's confusion as they also fit the above category, and my conviction is NOT very strong enough to hold them for more than 5 years (as I believe that very long term return may be below average returns)
• Mazda, but since this is a small cap, I need to build that conviction again through a deeper analysis.

I'll now work towards reviewing my existing holding and re-allocating based on benefiting from opportunities and maintaining a reasonable asset allocation.


UPDATE as on 25th May 2013
Here're the charts showing my current asset allocation

As can be seen from charts above, my current portfolio is heavily inclined towards "retirement investments", and I need to balance the same. Here's what I need to do:

1. Need to infuse new capital, as I can't reduce Provident Fund and re-allocate it into other investments
2. Need to increase investments in the following asset classes
- Stalwarts (medium term horizon)
- All forms of mutual funds, including a dividend plan which would generate regular income
- Withdrawable bonds, like Fixed Deposits. This is to ensure we always have liquid funds for emergency needs, and which can be withdrawn within couple of days. It may so be the case that I'll maintain a minimum investment in liquid debt fund and not go for a separate investment, but considering the size of my current portfolio, I need to infuse new capital for any new investments, and the current size of HDFC Cash Management Fund only covers for "withdrawable bonds' category.