Amar Am­bani,

Head of Re­search, IIFL In­vest­ment Man­agers.

Dalal Street Investment Journal - - SPECIAL REPORT -

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.

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