Asset allocation is how you must decide the level of risk you are willing to take for returns you will generate. Usually, the younger you are, the more risk you can take.

International Women’s Day usually ends up being just that: a day with maybe some extra cheer but not much else. Let’s use today to give ourselves some TLC (Tender Love and Care) that actually compounds over time —our financial health.

At the outset, let me say something controversial: studies have shown that women are better investors than men. Researchers at Cal-Berkeley studied equity investments of men and women from over 35,000 US households from February 1991 to January 1997 and found that women outperformed men by 0.94 percent per year and traded 45 percent less frequently than men.

It is also unfortunately true that women don’t participate in the investing process enough. Only around 25 percent of demat accounts in India are owned by women. The latest data shows that during the lockdown, far more women started opening broking accounts and taking an active role in investing.

Step 1: Asset allocation

Even the financially savvy get tripped up in their investment goals because they often skip Step 1. Asset allocation is how you must decide the level of risk you are willing to take for returns you will generate. Usually, the younger you are, the more risk you can take. Therefore, as Rule 1, figure out how much of each asset class you should be invested in.

Further, to limit your risks, the idea should be to be invested across multiple asset classes that are not correlated with each other.

For example, equities give you big upsides and also large downsides—2020 is a great example of both, debt has a more or less range bound return, the gold movement has historically moved in the opposite direction of equities.

Therefore, if you own a little bit across assets, your risk-return ratio is better as one asset hedges the other.

So, what are the different categories of assets you should consider in 2021:

Equities

Let’s break this up further—largecaps/ bluechips are considered ’less risky’, midcaps more so and smallcaps, the most. Therefore, just like with asset allocation, split your equities between these three groups based on your risk appetite.

Diversification does not just mean investing across the three buckets. It also means diversifying the approaches you invest behind. Using technology to be an unbiased, unemotional investor allows you to hedge against classic pitfalls all humans suffer from—euphoria and panic. Therefore, look to add some tech products to your asset mix as well.

ETFs

With largecaps, human experts are struggling to beat the Nifty over the last five years. This is because largecaps see the most inflow of capital and therefore are more efficiently priced. ETFs to take Nifty exposure is, in our view, the most cost-effective way to invest in largecaps.

Mutual funds/smallcases 

With mid and small caps, there is more room to find mispriced or underpriced opportunities. As you look to diversify here, look for managers who have a solid approach that does not change with market conditions, who do not take needless risks that you are not comfortable with.

Even the avenues for equity exposure have grown—now it’s not just mutual funds, but also products like smallcase that offer you multiple advisers with differentiated approaches that you can understand and invest with easily.

Do remember, past returns are an important but not the only indicator of a good product because equity returns are generally lumpy in nature, unlike debt.

Debt

The older you are, the more you should invest in products with stable, linear returns. Therefore, for starters, investing in your provident fund which gives excellent tax-adjusted returns is a great saver for your retirement. Apart from that, be sure to diversify your debt exposure across FDs, liquid funds, corporate bonds, etc, which are different investment grades and therefore in different places on the risk-reward curve.

Similarly, you should hold in FDs or liquid funds, the money you think you will need in the short term.

Real Estate, infrastructure

With the advent of REITs (real estate investment trusts) and InvITs (infrastructure investment trusts), retail investors can take smaller, more liquid exposure in real estate. Investing in real estate in 2021 seems counter-intuitive since most of us have worked from home and commercial offices are empty. Further, residential real estate has been in a slump for several years. However, this is exactly why you may include it in your asset allocation. Over the long term, offices will restart, people will buy houses and roads and infra projects will be built.

Therefore, while Indians typically hold large parts of their wealth in the home they own, this is a more reasonable allocation option.

Commodities

The most widely used is investing in gold. However, typically most Indian households, particularly women, have a large part of their assets already in gold. Therefore, more than any other asset class, gold is usually part of investor portfolios. In any case, there are more virtual ways of holding gold than just in your locker—digital gold, gold MFs, etc.

Apart from gold, think about the future of technology and the type of commodities that will play a role—every smartphone contains precious metals including gold, silver, copper, platinum, electric cars need lithium for their batteries, and oil (at least in the short term) runs the world economy. There are products on MCX and several US ETFs that can provide exposure here.

Cryptocurrency

Bitcoin has become the talk of the town with its eye-popping returns this year. Generally, the factors working in the favour of bitcoin are (1) it is usually uncorrelated to any other asset class; (2) there is limited supply and most of it has been mined; and (3) there is talk of cryptocurrencies replacing gold. However, crypto remains a very volatile asset class and its valuations are driven by supply-demand pressures.

In general, things to watch out for across the board are the taxes you will pay on your investments as well as the cost ratios of any fund you are investing in. These are often overlooked and always critical to your investment decision. Further, every one or two quarters, take a look at the portfolio to rebalance and update asset allocations.