The advent of neo liberal democratic governments in the post USSR world order has ensured a firm hold of market forces over national economies. Regardless of the financial status of the economy of a nation, the stock markets within all countries are a thriving source of income generation. India; in particular, has immensely benefitted from this trend, especially since the opening of the economy by the Congress government led by former Prime Minister Narsimha Rao. India, with its State protected domestic industrial sector and a stable services sector has thrived on the back of the volatility of open market economies and has attracted many institutional as well as private investors into its stock markets. The financial, industrial and fiscal robustness of the Indian economy has succeeded in making India a prime location for foreign investments, unlike the markets in the rest of the subcontinent.
However, this progress has been marred more than once by certain discrepancies inevitable due to a lax speculation oversight system, which is quite typical of a State power that represents a national and petty bourgeois section of population. Several scams and systematic market manipulation by big corporate houses has intermittently hurt the small private investor and by extension the larger economic interests of the country. Therefore it becomes necessary for new and established investors to guard against speculative and unsettling forces within this field and plan accordingly to minimise losses and maximise profits out of trading. In this endeavour, the phenomenon of Asset Allocation strategies can be of immense assistance.
Asset Allocation Strategies: Definition, Explanation and Scope
For novices in the field of share market investment and those who are not very conversant with regards to modern share market investment strategies, it is necessary that a simple, clear and explicit definition of the term ‘asset allocation strategies‘ is provided. The importance of risk minimisation is such that every investor in the market, whether big or small, has to understand the contours of asset allocation strategies and put them into practice before making any significant investment for long term.
Asset Allocation is a form of investment strategy wherein the investor resorts to asset diversification to reduce the overarching risk of investment against the best possible returns. An asset allocation strategy is one that adjusts the performance percentage of each asset within the portfolio of investment of an individual or a bunch of individuals. Asset allocation strategies can be tuned on the basis of a variety of factors- the investor’s readiness to take risks, his long term or short term goals in terms of investments or the time frame for which he is willing to invest funds in the investment portfolio.
According to financial experts, such diversification of assets is the ‘only free lunch you will get in the game of investment’. The logical explanation for resorting to asset allocation strategies is that different classes of assets display different financial performance in different financial contexts and share markets. Hence, the diversification of investment across a broad spectrum of assets ensures relatively less risk against a relative assurance of (long term or short term) profits.
Types of Asset Allocation Strategies
Asset Allocation strategies can be of different types, depending on the preferences of the investors and the market forces. They vary according to the risk tolerance level of an investor, his/ her financial goals and the time period for which he wants to make the investment in the specific asset portfolio. The 3 types of asset allocation strategies are – strategic asset allocation, tactical asset allocation, core-satellite asset allocation.
• Strategic asset allocation- Strategic asset allocation is an asset allocation strategy which attempts to reach an optimal balance between the expected returns and the expected risk. This particular strategy is applied when the investors is eyeing a long term investment, hence the word ‘strategy’.
• Tactical asset allocation- The tactical asset allocation is an asset allocation strategy meant for those investors who do not intend to invest on a particularly long term basis, hence the use of the word ‘tactical’. Through the application of this strategy, an investor attempts to invest in those assets which offer the maximum potential profit.
• Core Satellite Asset Allocation- This is a temperate combination of both strategic asset allocation and tactical asset allocation and seeks to capitalise on the plus point of these two asset allocation strategies.
There is another allocation strategy called systematic allocation strategy which depends on a number of theoretical assumptions.
To encapsulate, it is a moral and financial prerogative for every investor; whether big or small, to keep in mind the practical and strategic usefulness of asset allocation strategies and invest accordingly. This would undoubtedly avoid any major losses due to the volatility of the share market.