Asset allocation is a diversification strategy. Proper asset allocation helps balance risk and reward by dividing money between different asset classes - cash (liquid fund), debt and equities.
Depending on an investor’s time horizon and risk tolerance, Wealthy suggests the right mix between liquid, debt and equity funds. For instance, if an investor is looking at a very short-term horizon with very little tolerance for risk then money is invested in a portfolio which is 100% liquid funds. Similarly if someone is investing for long-term with an aggressive outlook then the money is invested in a 100% equity portfolio.
Further, in all such portfolios money is further allocated to different asset classes. For instance, 100% equity portfolio is allocated in certain ratio between small cap, mid cap and large cap equities. Such allocation helps you earn optimal returns while also maintaining the level of risk you are comfortable with.
Each Wealthy portfolio has been simulated using historical data of last 15 years to create the most optimal allocation model.
Typically, to take advantage of asset allocation, users create multiple portfolios to meet their various needs. For instance for long-term wealth creation, most popular portfolio is Long Term Aggressive (100% equity) portfolio. People who have near term goals such as buying a car or saving money for marriage or vacation typically invest in Medium Term Balanced (60% equity, 40% debt) portfolio.
Screen the fund universe and create all possible combinations of the funds that match the right criteria
Compute returns, volatility and correlation between funds for each and every combination and time period.
Extract all combinations that give the highest returns and select the one the least possible risk.
Over time, market movements can cause a portfolio to shift away from its original asset allocation. Such a shift can alter the risk-reward balance of your portfolio. Rebalancing is a portfolio management technique that helps maintain the asset allocation throughout the life of an investment.
Rebalancing is essentially a technique that helps lower volatility but over-time it can also add additional return potential to your portfolio.
Let’s say, you started investing in a 60:40 equity-debt portfolio but because of a sharp market rally your equity component goes upto 70. The risk profile of your portfolio has now changed significantly (higher equity makes it more risky) and hence any additional investment should go towards debt.
Similarly, if market goes through a correction reducing equity component to 50 then any additional money should first go towards equity. In this case, rebalancing helps add additional return to your portfolio as you are buying more equity at a much lower price.
Currently, we rebalance your portfolio every-time you make an additional investment in your portfolio. With every additional investment (manually or via autopay) the algorithm splits your new money in a way that the original ratio between different funds is maintained.
For instance, if your original portfolio was 40:20:20 but by the time you make a second investment it has changed to 38:17:25, then your money will be split in such a way that your portfolio comes back to 40:20:20 split.
While selecting funds, Wealthy takes care of historical track record, consistency of performance and overlap between different funds. However, over time funds may consistently make bad calls or show a considerable under-performance requiring replacement of fund in the portfolio.
As and when a fund change happens in a particular portfolio, each user is notified about the change. From that day on, no new money is invested in the ‘deprecated’ fund. Over time, as and when the investment in the deprecated fund becomes free of exit load / tax liability, the system will notify you of steps to shift the money from deprecated fund to new portfolio.
At Wealthy, we pay little attention to star-ratings. Most of these star-ratings have a recency-bias, that is only the most recent performance decides the number of stars a fund deserves. This approach is not suitable especially as most investments are for a minimum of 3 years. Consistency of a particular fund is much more important than it’s most recent performance.