Asset allocation and its importance – All you need to know

Asset allocation and its importance – All you need to know

Asset allocation and its importance, you should know in order to manage your investments better.

In addition, Asset allocation means allocating your money to different assets like gold, equity, fixed-income securities, etc.

Moreover, investors should do asset allocation to reduce risk in their portfolio based on their risk profile and to achieve their future financial goals.

asset allocation

Why asset allocation is important?…

asset allocation and its importance
Where to invest my money. Colorful circle chart animation showing different areas of investment on white background. 3d rendering.

There is no fixed asset allocation for you to follow. You can do any asset allocation as per your needs and risk appetite.

Every asset class has risk; some may carry high risk and some low risk.

And this risk can be decreased with the help of asset allocation.

In addition, investors use different allocations for different financial goals.

If you are looking to buy a car next year, You may invest in cash or cash equityvalent asset class like liquid funds, overnight mutual funds, ultra short-term funds, etc.

And the investors looking to invest for their retirement goal will invest in equity at least 60%.

However, investment in equity means you are dealing with a high-risk investment; you should be aware of risks.

Age-Based Asset Allocation…

Financial advisors advise investing in equity for financial goals that are at least 5 years away from now.

In addition, cash and cash equivalent assets for financial goals that are less than a year away.

and invest in bonds for goals that are between 1 and 4 years away now.

Let’s assume that you are investing for your retirement goal, and your age is 30 years now.

In addition, as per 100 “minus” present age is one such asset allocation strategy, which will decrease equity exposure with an increase in age.

As per this asset allocation strategy, you need to invest 100–30 (present age), i.e., 70% in equity and 30% in fixed income.

And next year, your age will be 31, and the new asset allocation percentage will be 100-31 (present age), i.e., 69% in equity and 31% in fixed income.

Finally, the equity exposure at age 60 will become 40% and fixed income 60% in this 100 minus age asset allocation strategy.

Asset allocation through life cycle funds…

NPS is one such example of a life cycle fund in India.

In addition, this NPS will target retirement, i.e., at age 60.

And will invest as per the mandate selected by the subscriber of this fund.

Again, this NPS will invest a maximum of 75% to 80% in equity, the rest in fixed income, and slowly decrease equity and increase fixed income gradually based on the fund’s objective.

Or some times the asset allocation will stay fixed throughout the period if the strategy is a fixed asset allocation strategy.

So, it is very clear that life cycle funds also follow an asset allocation in order to cater to the risks.

Changing the asset allocation based on economic changes…

If you feel the economy is about to boom for the next few years, you can invest more in equity and less in fixed income.

And at the same time, if you feel that the economy may face hurdles in the coming years, you can invest less in equity and more in fixed income.

Moreover, this type of strategy is called tactical asset allocation strategy.

And you may use statistical tools like empirical formulas to time the investments.

Finally, balanced advantage funds in India also change asset allocation based on the economic changes.

Asset allocation funds…

An example of this type of fund is balanced mutual funds in India.

In addition, these funds will follow a fixed-income strategy.

Like 65% in equity and 35% in fixed income.

And after some time, this % exposure will change due to the different returns given by the assets in the fund.

In order to bring back the asset allocation to 65% equity and 35% fixed income, rebalancing will be on a periodic basis.

In this way, this fund will follow a fixed asset allocation strategy to reduce the risk.

What is a good asset allocation?…

There is no thumb rule for asset asset allocation to invest.

In addition, it depends on individuals risk appetite and financial situation.

And generally, 60% equity and 40% bonds will give optimum returns with a reasonably reduced risk.

However, the above 60:40 asset allocation is also not if your financial goals are less than 4 years away.

What is the best asset allocation based on my age? …

Generally, the younger you are, the more risk you can take.

So, Young can invest as high as 75% in equity to get optimal returns from their investments.

But do not forget to decrease the equity exposure slowly when your financial goals are about to arrive.

Read about the best way to invest in nifty 50.

Also read about debt mutual funds—all you need to know…

And read about Gold Investment: The Best Way to Do…

Also read about Bank Deposit Insurance—All you need to know…

And read about how to beat one crore wealth with one lakh investment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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