Let me start by saying that Asset Allocation is not a wealth creation tool. At best it is a wealth protection tool. Somewhat like insurance – it cannot make you rich, but can ensure that you do not become poor because of an accident.

I am also not a big asset allocation fan from equity to debt because I still consider that the gap between debt and equity returns in India is too damn wide.

Having told you all that let me tell you the following too…if a person has a job like a debt fund (Government service, indexed pension) then his portfolio can have a lot of equity. However if he is a poor IFA, his portfolio should have a lot of debt. Maybe good quality debt assets like psu bonds which are listed. The government servant can be assured that he will not lose his job, he can be sure about his indexed pension…and thus he could go in for a more equity oriented portfolio.

Now come to another issue. If you have 3 clients (assuming you are an IFA doing asset allocation for a client) how do you do asset allocation for a client who has a huge ESOP? Should he invest in other companies in the same business? If he has a net worth of say Rs. 6 crores and has a ESOP component of say Rs. 5 crores in Hdfc bank. Should his regular portfolio consist of banking stocks at all? What if his SIP is in Hdfc equity fund which has say 35% in banking stocks? Should he buy some put options on Hdfc bank?

Is it too risky to have a concentrated portfolio? How and when should he decide to do an asset allocation? What happens if he value of Hdfc bank keeps going up? Or an investor who has similar numbers in Oracle? Should he hedge? (remember hedging is the owner’s right not the fund manager’s right).

Really tough questions to answer….no go and find the answers…..my job of asking is over….

 

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  1. but in reality a person with government job invests more in fixed income in the form of endowment policy, FD, post office etc.

  2. If you own large % of ESOPs in your portfolio and are still working then it is a given thing that your job also is linked to the same company. In that case it is absolutely necessary that you do not invest in shares of any other company from the same segment of industry.
    ESOPS are much more volatile than normal equity investment and it is best to have a plan of how to handle ESOPs.
    I feel asset allocation ensures your investments grow in a planned manner. You have to have a documented asset allocation plan and should re balance your portfolio periodically. Once a year at least.

  3. ‘likely to be same company’ why? I have a friend who has worked in a Tech company and a bank…he has both esops…but now not working in both..has ESOPs..

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