What is Asset/Instrument? What is Asset Allocation ? Ideal Asset Allocation:

What is the meaning of asset/instrument?

While talking of investments we will use word asset and instrument almost in similar sense. Suppose, I want to invest in equity share of ABC LTD, then I will purchase it’s shares from stock exchange. Here equity share is an asset, an equity asset class, while similarly the listed equity share is instrument as well. Many times instrument are multiple then the asset class. For e.g. I want to invest into gold, so here gold is asset class (we will include gold into a broader commodities asset class, then say gold as an independent non-umbrella standalone asset). But there I can invest in gold via, gold futures, gold etf, gold mutual fund and physical as well; so here all these four are instrument, different instruments. However we will not complicate and use both words as mostly meaning same, as it is not of much importance for our fundamental understanding.

Main types of asset classes:

Main Head	Equities	Debt	Commodities/Real Assets	Real Estate
Includes	Equity shares, DVRs, Warrants, Depository Receipts, Equities of Foreign Country listed cos, Equity index etfs, Equity mutual funds.	Bond, Bank FD, Company FD, Government bonds, Corporate Papers, mortgage backed securities, debt mutual funds	Metals like gold silver copper etc. Energy commodities like crude oil, natural gas etc. Livestock like cattle etc. Agricultural commodities.	Real Estate Land, Rental property, listed real estate investment trusts REITs

IMPORTANT NOTE:

We have not included derivatives. So weather derivatives, carbon trading, and power/electricity trading are not included. Derivatives are not an asset class. They are hedging, arbitraging and speculating instruments.

Cash can also be an asset; however it does not incur any return and does not fall into any of 4 investment objective criteria, so not included.

It is not possible to write all possible asset names. We have put some names. There are hundreds of commodities trades. And variety of instruments in debt asset class as well (However one should beware and make strong distinction between actual debt instrument and a derivative of debt instrument).

Also if some mutual fund says it is investing in only ‘real estate companies’ then also it is an equity asset instrument. Similarly if any mutual fund/investment vehicle says it invests only in ‘commodities companies’, then it is also an equity asset instrument.

What is asset allocation?

Now, as we have understood what an asset is and also known different asset classes; we will go ahead.

Basic: Asset allocation is nothing but answering the question to: “What % of investible amount you will invest in each asset class?”

Advance: After answering the question no.1. You will decide which instrument to select in each asset class. You will also decide on monitoring these asset allocated portfolio and make changes to allocations as per your strategy based on pre-determined strategy or based on light of new facts and so on.

IDEAL ASSET ALLOCATION across all asset classes: (Ideally what % of investible should you invest in each asset class)

EQUITIES	DEBT	COMMODITIES	REAL ESTATE	Total
50%	25%	25%	0	100%

*Here we have assumed the investor to be of age 25 and so investment in debt is kept at 25%. We advise investment in debt as much as the age. I.e if you age is 30 you should invest 30% in debt and 70% in equities and so on.

*This allocation strategy is for average investors.

*For large sized portfolios mandated to be managed with asset allocation strategy and diversification (running into several crores and millions) we advocate investment into real estate at 20% which will be reduced from equities investment part.

*Many times the benefit of investing in commodities is inherent in investing in equities. However, direct investment in commodities are increasing and the return on commodities are decoupling day by day as has been emerging as a standalone and sustained long term asset class. Before one decade there was no such thing as commodities investment.

IDEAL ASSET ALLOCATION in Equities Only: (Ideally what % of investible should you invest in Equity Market Classification?)

Large cap, Front line	Midcap	Smallcap	Penny stock	Sectoral classification	International Equities
·         Top 100 market capitalization stocks	·         Top 201-300th list market capitalization stocks	·         Stocks in market capitalization list of 300th and above	·         Stocks having market price of rupees 10 and less.	·         For e.g., if you have provided for certain % to be invested in real estate stocks only then you are said to be investing in a sectoral classification.	·         Investment into foreign stock market must be classified separately as we are addressing average indigenous investor here
50%	20%	10%	10%	None	10%

*You will find many other classifications such as micro cap,

*Please find different article explaining better all these classification within Equities.

*There are at least more than 3 different definitions of large cap, mid cap and small cap stocks. According to one definition large cap=those stocks which are in the top 100 market cap list (market cap/market capitalisation= no of paid up equity shares x current market price of the share); while mid cap is those stocks which comes in 101 to 300^th list in terms of market capitalization, while all other i.e stocks that come in list of 301^st and ahead comes under list of small cap group of stocks. This is not a universal definition. Many people define differently. However we will go with this definition and classify stocks in this fashion for our purpose.

*Some people also put classification of ‘micro cap’. These companies are those whose market cap is very very low. However, we have let it out purposefully as it is not necessary to separately classify and increase complexity.

*Classification of Stocks into further any classifications will add only into complexity than utility.

*Separate provision for sectoral is not required due to the fact that when one is focusing on sectoral specific investing, one is indeed making a saperat portfolio itself. Also, the stocks in this sectoral portfolio will be included in calculating weightage under large cap, mid cap, small cap and penny stocks genres.

At this point it is important to note that ACROSS ASSET CLASS CLASSIFICATION includes Debt, Commodities and Real Estate separately while ACROSS EQUITIES CLASS CLASSIFICATION does not include them.

So, the point is that you have to decide while allocating (1) lump sum money, or (2) SIP money, that you are investing for which type.

We will emphasize mainly on ACROSS EQUITIES CLASS ALLOCATION, however if any investor want to include Debt, and Commodities also then we will devise portfolio accordingly.