Asset Allocation is a well balanced meal which has right mix of carbohydrates, fats, proteins and Minerals. A well-balanced diet provides enough energy and nutrition for optimal growth and development. A basic rule of wealth Creation is Investing across different asset Classes.
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.
“Don’t put all your Eggs in one Basket” says it all. If a basket is Dropped, All is lost. The Goal of asset allocation is to maximize Returns at a prudent level of Risk or minimize the risk involved in achieving a certain return.
Factors to consider while arriving at Right Asset Allocation Mix?
- Financial Goals: Goals can be short tern or long term. Goals will help in identifying Investment horizon and hence the asset class can be chosen. Time horizon is the number of years you have available to invest. For example: If a young man has short term goal after 3 years , investing in equities may prove to be risky.
- Risk Tolerance: Higher Risk, Higher the Reward. If one wants to reap rewards. Financially, one may be required to take some risk. Risk taking appetite is generally linked to the age, a young man may be willing to take higher risk than a man who is approaching retirement. But risk doesn’t mean putting all your money into speculative activities.
- Liquidity Needs: If you require money more often or in a short time period, then investment should be made in easy exit options’ schemes and vice versa.
The Asset Menu:
|
Asset Class |
Products |
Characteristics |
| Debt | Fixed Deposits, Public Provident Funds, Bonds, FMPs and likewise | Debt promise to pay a fixed interest plus principal at Maturity |
| Equity | Stocks, equity Mutual Funds, ETFs | The equity markets may move up or down. |
| Gold | Physical gold, Gold Funds | Gold acts as an hedge against Inflation |
| Real estate | Physical assets for residential or Commercial use | These assets appreciate with time. |
REBALANCING:
Once the optimal asset allocation has been established, one needs to review the investments regularly and see if portfolio matches the goal plan. Rebalancing should be done by selling the assets which have appreciated and buying those that have fallen in price. In this way, it also takes care of the principle of Selling High and Buying Low.
So, we see that Asset Allocation can help balance the “Return Potential and Risk” and It makes good sense to a disciplined investment strategy. Its time to personalize and revise your portfolio if needed.
If you have any queries in regards to how Asset Allocation should be designed, you can send them to gurleen@hareepatti.greatestdesignever.com.
Gurleen Kaur is a Financial Consultant and devotes her time to her company www.hareepatti.com. She has done her Bachelors in Finance and Investment Analysis(BFIA) from College of Business Studies(CBS, Delhi) and MBA from IMT, Ghaziabad. Currently she is also pursuing her studies in order to become a Certified Financial Planner.
She can be Contacted at gurleen@hareepatti.greatestdesignever.com