Head of Research, IIFL Investment Managers.
The importance of asset allocation and portfolio weightage can never be over-emphasizsed. The bulk of portfolio returns can be attributed to the asset allocation decision and a smaller percentage to the instrument selection decision and market timing. Imagine a scenario where a person seeking a multibagger 'tip', parks ₹5 lakh in a stock on his friend's advice from his wealth of ₹10 crore (largely parked in bank fixed deposits). Now even if the said stock appreciates and swells his original investment to ₹15 lakh in quick time, he cannot view the gain in isolation. He must see how much his net worth has appreciated in a year. In this case, instead of looking for equity tips, he would be better-off, focusing on moving a major portion of his fixed deposits into other debt instruments such as debt mutual funds, tax free bonds; even equities if it matches his goal and risk-appetite.
Talking of stock portfolio allocations, fancy notions of diversification or simply the lack of understanding of weightage importance often results in wayward investments. Not just retail investors, I have seen scores of HNI clients left with equity portfolios comprising umpteen number of stocks piled up over time almost without rhyme or reason (some of them suspended
and delisted scrips!)
In case of large-caps, it is prudent to decide the weightage – whether overweight, underweight, or neutral - benchmarked against the Nifty/sensex for the specific sector or stock. This comparison offers credible sectoral insights based on which, one can chart his or her own course, either of placing a bigger percentage bet, reducing exposure, or going neutral. In case of mid-caps, if one has zeroed in on some stocks based on high conviction, it’s important to commit deep. But there are times when I see positions in small-caps and mid-caps being 0.2% of portfolio and 100-plus stocks, making it difficult to monitor as well.
Portfolio weights make sense not just from the return perspective, but also from the standpoint of risk, liquidity and investor's goals. For instance, investors wanting to limit risk can remain disciplined by assigning a maximum allocation to mid-caps in their portfolio. Also, large-caps with bigger free float will be highly liquid, whereas a small-cap may carry big impact cost, especially when you want to cash out. Portfolio weightages help make these decisions.