Asset Allocation Approach

Samedh Investment Advisory issues advice to Indian Investors by suggesting a Model Investment Portfolio for a particular quarter at the beginning of each quarter. This Model Portfolio is called Samedh Dynamic Mutual Fund Portfolio (SDMFP). Samedh Dynamic Mutual Fund Portfolio (SDMFP)  is relevant for Indian investors who can take exposure to all financial asset classes, based on their capacity and willingness to take risk and have a 3-year investment horizon.

Asset Allocation Groups

Samedh Dynamic Mutual Fund Portfolio follows a top-down investment approach. For the same, the Investment Products available to Indian investors have been grouped into Asset Allocation Groups based on the correlation of their price movement with each other. Established and accepted benchmark indices’ data has been used to calculate the correlation of price movements. The segregation of Investment Products into various Asset Allocation Groups is to avoid high volatility in portfolio through diversification.

The four representative benchmark indices whose data has been used for analysis, are mentioned below:

Nifty 50 : As represientative for investment made in Indian Equities.

Gold (INR) / 10 gm : As representative for investment made in Gold. Price adjustments due to taxes have been avoided for the same, and only the output of international Gold prices in USD multiplied with USDINR exchange rate has been used.

10-Year G-Sec Yield : As representative for investment made in long-term interest paying schemes in India.

3-Month G-Sec Yield : As representative for investment made in interest paying liquid schemes in India.

Samedh Investment Advisory aims to advice on investments based on long-term market pricing cyclical trends, hence the data used for analysis are monthly index levels over several years. For all the indices mentioned above, the month-end closing prices have been used as benchmark level for the particular month. Data series used is longer than 10 years for all the four indices.

The correlation been Nifty 50 and Gold (INR) has been found to be very high at 0.90. Consequently these have been merged into one Asset Allocation Group termed as “Growth” since both these primarily generate return through growth in market price.

10-Year Government Security Prices have a low correlation with Nifty 50 and Gold (INR)  as shown in table below. Since it is a representative of investment made in long-term interest paying schemes in Indian, such schemes have been clubbed into a separate Asset Allocation Group termed as “Income”.

Asset Class Correlation

Gold (INR)

Nifty 50

10-Yr G-Sec Price

0.48

0.34

The third Asset Allocation Group is of Cash and Cash Equivalents. This comprises of Investments made in interest paying liquid schemes in India. The 3-Month G-Sec Yield is the benchmark for interest earned in such schemes. The investment products in this Asset Allocation Group are devoid of market pricing cycles and are considered to be always priced at fair value. This Asset Allocation Group has been termed as “Liquid”.

Asset Allocation and Phases of Market Pricing Cycle

Asset Allocation for a particular Quarter is objectively calculated in the Samedh Dynamic Mutual Fund Portfolio based on lag or advancement from historical average annualized return generated by particular Asset Class. Faster advancement than average return leads to lower expectation of future return and consequently lower allocation to a particular Asset Class. Inversely lag from average return leads to higher expectation of future return and thus higher allocation to the Asset Class. The average annualized return for the four Asset Classes linked to the identified Benchmark Indices as calculated from month end data points of long dated data series are mentioned in the table below:

Asset Allocation Group Asset Class Benchmark Index Average Annualized Return Analysis Start Year Remarks

Growth

Equity India CNX Nifty 50

11.5%

1990

1.5% Dividend Yield separate from Average Annualized Return due to price appreciation
Gold (INR) Gold (USD) * USDINR

10.7%

1979

Income Long Term Government Security G-Sec (10 Year)

7.5%

2001

Liquid Ultra Short-Term Government Security G-Sec (3-Month)

7.1%

2007

As mentioned in Value Investing, the transaction decisions in Samedh Dynamic Mutual Fund Portfolio are based on current phase of market pricing cycle of Asset Classes. The main focus is on ensuring safety of principal while taking investment exposure to the various asset classes to generate an adequate return. The target annualized return for Samedh Dynamic Mutual Fund Portfolio over 3 year period is 16.0%.

Investment Option(s)

Investors following the advisory can invest in any Investment Products of their preference, that are linked to the particular Asset Class Category. But the allocation and transactions should be made as advised in the quarterly portfolio.

Investment Option(s) have also been mentioned for each Asset Class Category, for benefit of investors who want to avoid the rigor of selection of Investment Products. These correspond to the Investment Product(s) in which portfolio allocations of SDMFP Index are made. The selection of Investment Option(s) is made as per following preference order:

  1. Index Funds: Passive open ended mutual funds that track the index are given 1st preference
  2. Actively Managed Mutual Funds: Actively managed open ended mutual funds whose benchmark is same as or similar to the Benchmark Index corresponding to Asset Class Category are given 2nd preference
  3. Exchange Traded Funds: Closed ended Index Fund units that are listed on exchanges as ETFs are given 3rd preference
  4. Largest Scripts composing Benchmark Index: Scripts that have the highest weight in composition of Index are given 4th preference

Disclaimer: Samedh Investment Advisory does not receive any commission for specifying Investment Option(s). These have been selected in a completely unbiased manner as per the preference order mentioned above. In case of availability of multiple options based on preference order, priority has been given to Investment Product with largest investment base.