In personal finance, few ideas sound as simple, and get misunderstood as often, as asset allocation. The default advice, especially for younger investors, is 'go heavy on equities and ride the long-term growth wave'. But that's only half the story. "Asset allocation is the foundation on which an investor's investment journey rests," said Megha Malpani, Partner at Zvest Financial Services, speaking on NDTV Profit's Your Money Matters.
Before deciding where to invest, she argues, investors need to answer two far more basic questions: "Can I afford this risk? And will I be able to stomach it if things go south?" The first question, which is of ability, is relatively straightforward. It depends on income stability, financial obligations, dependents, and whether you have enough surplus to absorb shocks. But the second, which is of willingness, is trickier.
"In a bull market, we overstate our risk appetite, and in a bear market, we understate it," Malpani said, echoing the behavioural insights of Daniel Kahneman. Loss aversion, she noted, means losses feel disproportionately painful compared to gains. That mismatch between what we can handle and what we think we can handle is where portfolios often go wrong.
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Strategy 1: Core and Satellite
One of the most widely used frameworks is the core-and-satellite approach, which divides a portfolio into two distinct buckets.
The core portfolio, typically 75% to 85%, is built for the long term. It includes relatively stable, diversified assets like equities, fixed income, gold, international exposure and even real estate. The idea here isn't to chase trends, but to build a base that compounds steadily over time. The satellite portion is where investors take tactical bets — think direct equities, PMS, AIFs, or even newer avenues like crypto or startup investments.
But Malpani is clear about the risks. "It's very important to define exit points in advance, and not invest based on FOMO," she said. Many of these products look attractive on a gross return basis, but once costs and taxes are factored in, they often underperform simpler core strategies.
Strategy 2: The 50-30-20 Model
Another popular framework is the 50-30-20 allocation, where 50% goes into equities, 30% into fixed income, and 20% into alternatives.
But Malpani cautions against treating these numbers as fixed. "Asset allocation doesn't work in fixed points, it works in ranges," she said. For instance, an investor might be comfortable with 45-55% equity, adjusting exposure based on valuations and market conditions. She also highlights how context matters, like a young investor with a small corpus doesn't necessarily need exposure to alternatives, while fixed income plays a critical role not in boosting returns, but in providing stability.
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Strategy 3: The All Weather Portfolio
Globally, one of the most talked-about frameworks is Ray Dalio's All Weather Portfolio, designed to perform across economic cycles. The model typically allocates 30% to equities, 40% to long-term bonds, 15% to intermediate bonds, and 15% to gold and commodities.
While elegant in theory, Malpani points out its limitations in practice—especially in India. The strategy assumes access to deep bond markets and instruments like inflation-linked securities, which aren't as developed locally. It's also worth noting that the portfolio has delivered lower returns than equities over the past decade and faced drawdowns when interest rates rose sharply. “It's an operating framework—not something we can blindly copy-paste,” she said.
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Strategy 4: Tactical Allocation
The final piece is tactical asset allocation, which involves making short-term adjustments to a long-term strategy. Here, discipline is everything. Tactical moves should be limited in scale—nudging equity exposure from, say, 60% to 65–70%, not swinging it to extremes.
“Late entry can be extremely damaging,” Malpani warned, citing recent trends in small caps and thematic funds.
As Malpani mentions in her closing thoughts, it all works "on the principle of via negativa." In investing, sometimes the smartest move isn't what you add — but what you choose to leave out.
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