Methodology
Asset allocation methodology
Objective, inputs, calculation, interpretation, assumptions, limitations and data sources.
Answer
Vestmind derives a target asset allocation by assigning each goal an equity share based on its horizon and the consequence of missing it, then taking the money-weighted aggregate of those goal allocations — rather than mapping an age or a questionnaire score to a model portfolio.
Objective
To produce an allocation that follows from what the money is for, and that can be explained goal by goal rather than asserted.
Inputs
- Goals: amount, date, priority, and whether the amount is fixed or flexible.
- Investment horizon per goal, using the weighted horizon of cash flows for goals drawn down over time.
- Risk capacity: income stability, other assets, and the consequence of a goal failing.
- Current holdings, so the target is expressed as a route rather than as an abstraction.
Calculation
- Horizon per goal. Years to the goal, or the money-weighted average year for a goal drawn down over a period.
- Equity share per goal. Under 3 years: 0%. 3–7 years: up to 40%. 7–15 years: up to 70%. Over 15 years: up to 90%. The upper bound within each band is reduced where missing the goal is not survivable.
- Non-equity split. The remainder is allocated to debt by the goal's horizon, with gold at a single-digit share of the total portfolio as a diversifier and the emergency reserve held as cash.
- Aggregate. The portfolio target is the money-weighted sum of the goal allocations.
- Capacity test. The aggregate is run through the drawdown sequences in the portfolio risk method. A goal that fails under a historical stress reduces the equity share until it does not.
Interpretation
The output is a target with bands, not a point. A five-percentage-point band around each asset class is the default trigger for rebalancing.
Two investors of the same age and the same stated risk tolerance will receive different allocations if their goals differ. That is the method working.
The allocation is a Vestmind calculation from stated inputs. It is not a personalised investment recommendation.
Assumptions
- Goals as stated are complete and their dates are approximately right.
- Equity is expected to compensate for volatility over horizons beyond roughly seven years — an assumption about the long run, not a guarantee about any particular period.
- The investor can hold the allocation through a drawdown. Where they say they cannot, capacity is reduced accordingly.
Limitations
- The bands are judgement calibrated to Indian market history and to the horizons Indian investors typically plan over. They are not derived from an optimisation and should not be presented as one.
- An allocation is only as good as the goals entered. An unstated liability is invisible.
- The method optimises nothing. It does not claim to produce a maximum-return or minimum-variance portfolio, and a mean-variance optimiser would produce a different answer with more precision and less robustness.
Sources
- Securities and Exchange Board of India (SEBI)
- National Stock Exchange of India — listed company disclosures and index constituents
How Vestmind does this
VestStudio is Vestmind's portfolio construction product. It turns an investor's goals, horizon and risk capacity into a target portfolio, then lets them simulate a change — a new allocation, a fund switch, a rebalance — and see its effect on risk, concentration and goal funding before any money moves.