WHAT IS THE MEANING OF ASSET ALLOCATION?
Asset Allocation is the process by which investors decide what quantum of the portfolio should be allocated to various asset categories – be it equity, fixed income or gold. Wealth managers believe if you spread your wealth across these three assets, it will smoothen your investments by helping in reducing volatility and maximizing returns.
IS ASSET ALLOCATION DIFFERENT FOR EVERY INVESTOR?
Yes, every investor will have a different asset allocation that will be determined based on your age, lifestyle, current financial health, goals and risk-taking appetite. For example, a conservative investor will be told to hold 30% in equity mutual funds, 60% in debt mutual funds and 10% in gold funds, while an aggressive investor can hold 70% in equity, 25% in fixed income and 5% in gold.
WHY IS IT NECESSARY TO FOLLOW AN ASSET ALLOCATION?
It is difficult for any individual to predict movements of equities, fixed income or even gold. So, whenever equities go down, and you have all money in that asset class only, you will be hit hard. However, if you have also allocated to gold and debt, your portfolio will be protected and not hit that hard. Hence, spreading wealth spread across assets gives the best risk adjusted returns. Wealth managers believe in the long term, 90% of the returns come from proper asset allocation.
CAN ASSET ALLOCATION BE IMPLEMENTED USING MUTUAL FUND SCHEMES?
Yes, one can make an asset allocation plan using a combination of mutual fund schemes. Mutual funds have schemes which give exposure to equity, debt and gold. Diversification and assets allocation plays an important part. Typically, before starting to make investments, a financial planner suggests an asset allocation after understanding an investor’s profile and risk-taking capability.
IS IT NECESSARY TO REVIEW ASSET ALLOCATION?
Asset allocation plays an important role in the success of any financial plan. Investors should review it at least once a quarter or in sixth months, and look at it in line with their life goals. If any of the asset class moves up or down by more than 10% of their target allocation, investors could consider rebalancing their portfolio.
Disclaimer: – Mutual funds investments are subject to market risk. Please read the offer documents carefully before investing.
