Asset allocation means dividing your investments among different asset classes, such as equity, bonds and bank deposits, among others. The strategy of asset allocation is used by investors to reduce risks and improve the chances of achieving financial goals.
There are different asset allocation strategies, and the best one depends on your finances, age, risk tolerance, and investment goals. Asset allocation is important because it helps you reduce risks. No single asset class is immune to loss, but by diversifying your investments among different asset classes, you can reduce overall risk.
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For example, if you invest only in stocks, you could lose a lot of money if the stock market crashes. However, if you invest in a mix of stocks, mutual funds, bonds and FDs, you will be less likely to lose a big amount of money if the stock market crashes.
Besides reducing risks, asset allocation can help you achieve your financial goals. For example, if you are saving for retirement, you will need to invest in assets that have the potential to grow over time. By investing in a mix of stocks, bonds, and cash, you can increase your chances of achieving your retirement corpus goals.
Create a plan
There are different ways to create an asset allocation plan. However, the following steps can help you get started:
Determine your risk tolerance: Your risk tolerance is the amount of risk that you are comfortable with. If you are not sure what your risk tolerance is, you can take a risk tolerance quiz.
Set investment goals: What are you saving for? Retirement? A down payment for a house? Once you know your investment goals, you can start to create an asset allocation plan that will help you reach them.
Adhil Shetty, CEO, Bankbazaar, says, “Asset allocation can be aggressive when you are young, but as you age, you become more conservative. The fear of losing your capital becomes higher. So, you gradually calibrate your portfolio for greater safety and lower returns.”
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Choose your asset classes: There are many different asset classes to choose from, such as stocks, bonds, and cash. The asset classes that you choose will depend on your risk tolerance and investment goals.
For example, a conservatively balanced portfolio consists of 50% equity, 30% bonds and 20%gold. Now assume that on average, equity returns are 12%, bonds 6%, and gold 4%. For every Rs 100 invested as per this asset allocation, this portfolio will generate Rs 6 on equity, Rs 1.8 on bonds and Rs 0.80 on gold. In all, it generates Rs 8.6 per Rs 100 invested or 8.6% per annum.
Once you have selected your asset classes, you need to determine how much of each asset class you want to invest in. This is called your asset allocation mix.
Over time, your asset allocation mix will likely change. This is because the value of different asset classes can fluctuate. To make sure that your asset allocation mix remains aligned with your risk tolerance and investment goals, rebalance your portfolio regularly.
If you are still confused about asset allocation, consider working with a financial advisor to create an asset allocation plan that is right for you. A financial advisor can help you to determine your risk tolerance, set your investment goals, and choose the right asset classes for your portfolio.
Finally, asset allocation is an important investment strategy. If you are an investor, you must consider creating an asset allocation plan to make the most out of your investment. It will allocate available funds as per your financial needs.
SPREAD THE BETS
* By investing in a mix of stocks, bonds, and cash, you can increase your chances of achieving your retirement goals
* Asset allocation can be aggressive when you are young, but as you age, you become more conservative
* Rebalance portfolio regularly so that the asset allocation mix remains aligned with your risk tolerance & investment goals
