In simple terms, asset allocation is a process designed to create balance in your portfolio by spreading your investments in various classes of assets. It is a strategy that focuses on balancing risk & reward by apportioning a portfolio's assets based on your appetite for risk, investment horizon and personal goals.
There are broadly three main classes of assets- cash & equivalents, fixed income and equities
All these three assets have different levels of risk & return, hence will behave differently over time
The principle of asset allocation is based upon a time test adage: do not place all your eggs in one basket
An investor can be safeguarded from volatility in the market only by diversifying investments amongst various asset classes
Asset allocation works on the rule that different asset classes perform differently in the given market situations
It is not always possible to predict performance of any asset class for a given period of time. This is where diversification helps mitigate or cut down, to some extent,the risks arising out of such uncertainty
Investments in MF are regulated by SEBI and your fund managers provide regular updates on how your investments are performing along with the strategy & outlook
Why Is It Important?
Since different investments react differently to any economic events or market factors, asset allocation can considerably reduce your portfolio’s volatility
So it is advisable to own different classes of investments in order to safeguard your portfolio from any particular risk type
Your Financial Planner will help you in determining the right asset mix as per your goals and risk taking appetite
Your portfolio should be planned in such a way that it is able to achieve the desired growth while minimizing risk over the time
Points To Remember
Every individual will have different asset allocation as per their need and investment strategy, but here’s few points that you must remember, like:
Diversification is the key here. Always diversify within the investment class too
Consider increasing your asset allocation for longer time zones
Owning both stocks and bonds reduces your portfolio’s volatility. So ensure you invest in both
Review your portfolio annually. It is better to be re-balance it periodically so as to ensure that your asset allocation is on track for fulfilling your goals
Always keep sufficient cash in hand for any short term requirements, so that you don’t have to sell any of the investments in case of any emergency
Avoid adding similar investments/stocks of same industry. Ensure to evaluate new investments carefully so that your portfolio benefits from diversification
