Asset Mix Decision as an Integral Part of Overall Portfolio Management: Some New Thoughts from
Indian Perspective and Ethos
(An article motivated through learning at Banasthali University, writings of Prof. Subhash Sharma, Dean, Indus Business Academy, Bengaluru & Greater Noida and classroom session of Dr. Harsh Purohit, Associate Professor and
Chair-ICICI Bank BFSI)


By
Ms. Aviruchi Bharti
Ms. Deep Suhasa
MBA III Sem (Finance)
Banasthali University (Raj.)
Category A University (MHRD, GoI)
Ranked 6th nationwide on factual data (AC Nielsen-India Today, August 15, 2011)
NAAC A Grade (2003)
 


Introduction

Asset Mix tells us that, which all assets are going to take space in our portfolio and how much will be their proportion. Whether a person is interested to invest in bonds, stocks or gold or property and how much will be their investment amount, it's totally his or her personal decision, like for e.g. an individual may think of investing 50% of his saving in equity, 20% in gold and rest would like to keep in Bank FD.

There can be unlimited number of portfolio combinations depending upon the different asset mix. The best asset mix that an individual can have, at any given point in life will depend largely on the time horizon and ability to tolerate risk.

Sometime back in past Asset Mix decision was concerned only with the "Financial Asset", dealing only with equity or debt. But at present, asset mix covers both "Financial Asset", as well as "Real Asset". Thus there can be two basic approaches to asset mix:-

a) Traditional Approach
b) Modern (Practical ) Approach- New thoughts

Traditional Approach:

Traditionally Asset Mix decision was only a 'financial asset mix decision', which was concerned with taking decision between the "Equity and Debt". So the decision making process was simple and involved only bond shares, T-bill, Government securities etc. The diagram below well depicts it.


Fig1: Showing the Traditional Approach

Modern (Practical) Approach: New thoughts

According to the modern approach the Assets Mix decision is concerned with 'real asset' along with the financial asset. Now the decisions need to be taken between various other investment assets also like property, paintings, gold, etc .The diagram below well depicts it.


Fig. 2: Showing the Modern (Practical) Approach

According to the Modern Approach the asset mix decision now-a-days can be categorized as

a) Rational  Asset Mix Decision
b) Irrational Asset Mix Decision
c) Holistic  Asset Mix Decision- rooted in Indian ethos & management

Rational Asset Mix Decision:

Under rational asset mix decision making, the decision of an individual is governed by the socio-economic factors .Investors take decision based on their knowledge, findings, and their economic situation. Furthermore this type of decision making tries to maximize the return per unit of risk.

Irrational Asset Mix Decision:

Under irrational asset mix decision making, the individual may choose to have such a combination which may be totally against his/her economic condition or the market situation. It may result in "supernormal profit" or "huge losses". Behavioral finance warns against such acts.

Holistic Asset Mix Decision:

Under this Holistic Asset Mix Decision along with the rational view, the individual is also guided by his/her intuition in taking decision.

In the present scenario this "holistic approach" must be given highest priority because now-a-days a shift has been noticed in our society, in the sense that investors are also trying to be ethical in making investment.

The equation of Holistic Decision making can be derived from WISDOM equation conceptualized by noted expert in Indian Management, Prof. Subhash Sharma in 1996 (Wisdom = Reason + Intuition) as, Holistic Decision making  = Rational decision + Intuition oriented decision.


Furthermore as the decision takes place through intuition (linked to heart, consciousness, and goodself) it increases the chances that the investor shall follow ethical dimension. This concept is a part of HDMM (Holistic decision making) , a concept given by Dr. Harsh Purohit, Banasthali Vidyapith in 2011, extending wisdom equation ( Wisdom = Reason + Intuition) and MBA model conceptualized by Prof. Subhash Sharma in 1996 .

It is indeed important to consider that one may invest with greater freedom both in India and abroad, thanks to internal liberalization and move towards capital account convertibility. This is also indicated by Prof. Sharma (2007) through Viswa model. Prof. Sharma has clarified in his path breaking book; "New mantras in corporate corridors- from ancient roots to global roots" that the word 'viswa' stands for the world and interestingly can be decoded as 'videshi' + 'swadeshi'. To the delight of the author of this article, the model says that 100% dependency and non-dependency are equally dangerous. What best can further support 'viswa' model than India or China at the time of US debt crisis. This is true with asset mix decision as well where both local and global opportunities must be visualized.

Conclusion:

Asset Mix decision should not stick itself to orthodox approach of Debt-Equity, but should be extended to Real-Financial Asset. Furthermore a Holistic Approach shall be further helpful in defining optimal asset mix for an investor. Working more on the approach can bring paradigm shift in decision making. Very shortly a question will emerge prominently, "Have you been ethical in asset mix planning?", and then keeping in view the alternatives available, consideration for dependents, and society the asset mix decision will be different.

References:

1. Chandra Prasanna (2009): Investment Analysis and Portfolio Management, Tata McGraw, New Delhi

2. Sharma Subhash (2007), "New mantras in corporate corridors- from ancient roots to global roots", New Age International, New Delhi

3. Sharma Subhash (1996), "Management in new age: western windows eastern doors", New Age International, 2nd edition, New Delhi, 2006

4. Wikipedia online, accessed during July 2011
 


Ms. Aviruchi Bharti
Ms. Deep Suhasa
MBA III Sem (Finance)
Banasthali University (Raj.)
 

Source: E-mail August 15, 2011

 

           

 

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