Asset Allocation

Asset Allocation means implementation of an investment strategy that seeks to                                     balance risk vs reward by adjusting the percentage of each asset in an investment portfolio

No two investor’s asset allocation will be the same as Asset Allocation Depends on various Factors like

  • Investors Risk taking Capacity :

Risk Tolerance plays a key factor role in asset allocation.As allocation of funds would depend on the investors Risk taking Capacity. If investor is risk averse and not willing to take risk then his major asset would be invested in debt funds whereas if investor is risk taker then asset would be allocated accordingly.

  • Goals of the investors :

If the goal to be achieved is at top priority and need to be achieved soon then asset would be allocated accordingly. Similarly, if the goal to be achieved is at medium priority then allocation would be done on that basis. Allocation also depends on PRIORITY of goals.

  • Time Frame needed to achieve Goal:

If the time frame to achieve the goal is long then major part of the portfolio would be invested in equity or equity related mutual funds or other funds. Similarly, if the  time frame is short  then major part of the portfolio would be invested in debt  or other funds where scope of market fluctuations is less due to shorter term.

For e.g.: Someone who is saving for new car to be bought next year might invest in a very conservative mix of Fixed Deposits, Short term Bonds, Debt Funds etc.

Another Individual who wants to save for retirement having time frame of 20 years can invest in stocks, equity mutual funds etc. The time frame to achieve this goal is long and he can take certain risk to get maximum returns on his investment.

Reason why Asset Allocation is needed:

  • Minimize market fluctuations and Maximize Returns:

Asset allocation should be reviewed and rebalanced after regular intervals based on market fluctuations and conditions. This would help to keep a track of portfolio returns and also helps to   avoid negative returns.

  • Adjusting portfolio’s risk over the time:

Portfolio’s risk can be adjusted by changing allocations for the different investments held. By anticipating changes in personal situations, changes could be made gradually.

  • Reducing risk in portfolio:

Investments with higher returns typically have higher risk and more volatility in year-to-year returns. Asset allocation combines more risk taking investments with less risk taking ones. This combination can help reduce your portfolio’s overall risk

  • Maintaining Discipline and not diverge as crowd flows.

  • Makes Investor more organized.