Tactical asset allocation

Strategic allocation fixes a target and holds it. Tactical allocation moves the allocation between asset categories on purpose, to take advantage of what different markets are offering at a particular moment.

The workbook is careful about the motive, and so should you be. The stated primary reason is not "to earn more". It is to improve the risk-adjusted return of the portfolio — either to cut portfolio risk without giving up return, or to lift return without adding risk. Also called dynamic asset allocation.

It is not recommended for everybody. The workbook says tactical allocation is typically suitable for seasoned investors operating with a large investible surplus — people who can absorb being wrong, and who have enough capital that a temporary tilt is worth the trouble. And it does not replace rebalancing: a tactically allocated portfolio still drifts and still has to be brought back.

A tactical tilt is a temporary, bounded deviation. An investor whose strategic target is 60:40 might move to 45:55 for a period when equity valuations look stretched, with a stated intention of returning to 60:40. Three things separate that from simply abandoning the plan: the strategic target still exists, the deviation is sized in advance, and there is a route back.

The trade-off is symmetrical and unavoidable. Reducing equity ahead of a fall protects capital; reducing equity ahead of a rally costs the rally. Because the tilt is a forecast, a wrong tilt is paid for in full — which is exactly why the workbook restricts the technique to investors who can afford the error and why most retail investors are better served by leaving the target alone.

For an investor who wants the effect without making the call, the same thing is available inside a scheme: dynamic asset allocation and balanced advantage funds run the tilt professionally, and a switch into one does not create a taxable event for the underlying shifts the fund manager makes.

An investor holds Rs 2 crore at a strategic 60:40. Believing equities are expensive, he tilts tactically to 45:55 for a year.

If he is right and equity falls 12% while debt returns 7.5%:

The tilt saved Rs 5.85 lakh.

If he is wrong and equity instead rises 18%:

The tilt cost Rs 3.15 lakh.

And that is before the friction: moving Rs 30 lakh out of equity and back again is two redemptions and two purchases, each carrying exit load where applicable, stamp duty at 0.005% on the purchase legs, and capital gains tax on the way out. A tactical call has to be right by more than its own transaction cost before it earns anything.

Chapter 1 (Investment Landscape), section 1.8, sets tactical allocation directly against strategic allocation and states both its purpose and its intended audience. The recurring question asks which approach is driven by market opportunity rather than by the investor's goals, or which is described as dynamic asset allocation. A second favourite: rebalancing is required under both approaches.

• The workbook's stated purpose is better risk-adjusted return — reducing risk without losing return, or raising return without adding risk. An option saying "to maximise returns" is the trap.
• Tactical allocation is not rebalancing. Rebalancing restores the existing target; tactical allocation changes the target on purpose, temporarily.
• Rebalancing is still needed under TAA. The workbook says so explicitly.
• It is "typically suitable for seasoned investors operating with a large investible surplus" — not the default recommendation for a first-time SIP investor.
• Dynamic asset allocation is the same thing under another name. Both labels appear in the workbook.
• Every tilt is a forecast, and a wrong forecast is paid in full, with transaction cost, exit load and capital gains tax on top.