Benefits of investing in a diversified portfolio

About The Company:

• An HNI client with an investment of INR 1 crore, all of which was invested in an active midcap fund of a famous mutual fund company.

Challenges and observations:

• The client was not aware of the risk he/she was taking to get the expected return on investment.
• It was a concentrated portfolio as there was a lack of diversification between asset classes and this was the reason for a low Sharpe ratio and high standard deviation.

Process:

• IFA team understood the client’s expectations from the investments and the risk appetite to maximize their risk-adjusted returns.
• A well-diversified multi-asset portfolio was created using IFA Global’s exclusive quant model.
• Periodic reviews were done to reallocate and rebalance the portfolio according to the predetermined weights and global market scenario.

Outcome:

• By adopting IFA’s quant model the client reduced the risk of the portfolio by up to 36%, which translates into a lesser drawdown of the investments in case of an economic crisis as all assets are not positively correlated.
• This can be noticed in the graph below where two of the most recent crisis are considered; the 2018 IL&FS default and the 2020 covid crisis.
  

• When we consider the IL&FS crisis, IFA’s INR 1 crore diversified portfolio would lose its value by just 5.9 lakhs and still be worth 94.1 lakhs. Whereas, the concentrated portfolio of the midcap fund would lose a value of over 14 lakhs and be worth 85.9 lakhs.
• Similarly, adopting IFA’s portfolio, during the 2020 covid crisis the portfolio would lose its value by 15.2 lakhs and be worth 84.8 lakhs. Whereas, the concentrated portfolio would lose its value by 31.3 lakhs (almost double) and just be worth 68.7 lakhs.
• The client also enjoyed higher liquidity as he/she was able to withdraw funds from the asset class which had appreciated in value and not book losses in case of an emergency fund requirement.