Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Equity allocation in your investment portfolio - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 27, 2005

    Equity allocation in your investment portfolio

    We had recently conducted a poll asking investors about their preference towards different asset classes as investment avenues. The choice had to be made between equities, fixed income securities and gold. More than 50% of the respondents preferred to invest into equities, whereas more than 35% preferred gold. At the current juncture, when the indices are scaling new heights, economy is in pink of the health, higher amount of global money is allocated to India and there is an increasing optimism towards equity markets with each passing day, we were not really surprised by the overwhelming response towards equities. Similarly, the preference towards gold appears to be the result of the recent run up in the gold prices. However, a prudent investment decision should not be based on the past performances but on the expected future trends.

    In this article we shall highlight some of the key fundamental aspects that should be kept in mind before deciding on one's equity allocation.

    How much to invest in equities? This is one of the key fundamental questions that an investor needs to ponder upon. While the final decision on the structure of investment portfolio depends on a number of factors, the decision should be based on the long-term requirements. For instance, five years down the line, you may need to buy a house or there may be a marriage in the family and so on. Similarly, the decision should also be based on the ability to bear the risk associated with an investment class. Given the improving infrastructure, sectoral reforms and productivity improvements, the economy appears to be in good shape and hence the performance of corporate sector. Hence, we feel that equities will continue to give relatively higher returns. However, in case of downturn, equities, as a class of assets, are the biggest losers. This factor assumes importance when one looks at the historical performance of the Indian economy, which has been volatile. When the next round of subdued performance will kick in is anybody's guess.

    When to invest? This is another fundamental question that has an important bearing on the performance, especially the equity portion of the portfolio of an investor. While we are not saying that one should try to time the market, what we indicating is that there is always an opportune period of investing, especially from a long-term perspective. The trick lies in identifying the same. For instance, in a capital-intensive industry like automobiles, the opportune time to invest is when the company has commenced its capex cycle. Incidentally, many of the 'experts', give a cautious view during such times, as the profitability is likely to be depressed due to higher depreciation and interest charges.

    Where to invest? For a long-term investor, this is another key to the investment decision in the equities. Ideally, from a long-term perspective, the investment should be in those sectors or stocks where there is visibility of growth. Similarly, one should also consider the degree of immunity that the investment provides against the cyclical risks associated with the performance of the economy. For instance, in the telecom sector, there exists a certain amount of visibility in terms of the increase in the subscriber base in next five to eight years. If one peeps into the past, the visibility was much stronger than it is today (at that time the call charges were significantly high and there were expectations of decline in the same). While we are not suggesting lapping up the telecom stocks, what we are trying to point is that, over a longer horizon, a prudent foresight should yield results.

    Valuation: As far as equities are concerned, valuations are the culmination of the entire investment process. An investment decision should be driven by the prudence, which is determined by the valuation that the stock is currently enjoying. To correlate our previous argument on the visibility aspect, today most of the telecom stocks are enjoying rich valuations (around 35 times their trailing 12 months earnings), when compared to broader indices. This requires caution, as one needs to decide whether the company has the capability to grow atleast at this pace going forward.

    To conclude, the asset allocation in an investment portfolio should be in line with the long-term objectives and the risk profile of an investor. For investing in equities, one should stick to the companies that have a good management at the helm of affairs, a relatively diversified and sound business model and a fair amount of visibility. Happy investing!



    Equitymaster requests your view! Post a comment on "Equity allocation in your investment portfolio". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 22, 2017 (Close)