Investors spend most of their time on selection — which fund, which strategy, which manager. Most of the outcome, however, is decided one level above that: how much sits in equity, how much in fixed income, how much in property, and how much is genuinely liquid.

Allocation is the decision that does the heavy lifting. It is also the one most often made by accident, as the residue of past purchases rather than as a choice.

Allocation as a statement of purpose

A portfolio should be able to answer four questions without hesitation: what is this money for, when will it be needed, what happens if it falls by a third, and what would have to change for us to alter the plan. Every allocation is an implicit answer to those questions. Writing the answers down first tends to produce a very different portfolio from working upwards from products.

Start with liabilities, not markets

Institutional investors begin with their obligations. Private investors rarely do, though the logic is identical. School fees in three years, a business expansion in two, an intended gift, a property purchase — each is a liability with a date attached, and each should be funded by assets that will certainly be available on that date.

Once near-term requirements are ring-fenced, the remaining capital can be treated as genuinely long-term. That single act of separation removes most of the pressure that leads investors to sell equity at the wrong time.

Diversification should reduce unnecessary risk without diluting conviction. Owning fifteen funds with the same underlying exposure achieves neither.

Where portfolios usually go wrong

  • Duplication mistaken for diversification. Several large-cap funds with 70% overlap is one position held four times, at four fees.
  • Hidden concentration. A family business, employer stock and an equity portfolio can all depend on the same economic cycle. The portfolio looks diversified; the household is not.
  • Ignoring currency. For NRI investors, the currency in which future spending will occur is part of the allocation decision, not a detail.
  • Real estate carried at cost. Property often dominates Indian portfolios but is excluded from allocation discussions because it is not quoted daily. Excluding it does not reduce the exposure.

Rebalancing: the unglamorous engine

Rebalancing forces the discipline most investors intend but rarely execute — trimming what has run, adding to what has lagged. It should be governed by a rule rather than a mood: fixed bands around target weights, reviewed at set intervals, with taxes and costs taken into account before acting.

It will always feel wrong. Selling the asset everyone is discussing to buy the one nobody wants is precisely why it works.

What we do

We begin every relationship with the allocation, including assets we do not advise on — property, business equity, employer holdings, retirement balances. Only once the shape of the whole is clear do we discuss whether an AIF, a PMS or a mutual fund has a role. Product selection is the last decision, not the first.