Quick lesson on‘Asset Allocation
Defined as the building block of investment planning, asset allocation is about investing across various asset classes such as equity, debt, gold, property, etc.
Here, various categories of investments behave differently while benefitting investors. For this, it is important for an investor to look for investment options (right assets)as per one’s financial requirements. The idea is to put your money into different investment categories to take advantage of varying situations.
How to assess your asset allocation needs?
Every investor has unique financial requirement, which usually defines her or her investing ideas. Thus, take a moment to think about your unique situation and risk appetite before formulating an asset allocation strategy.
Here it is important to segregate your investment plans basis on:
Your funds: Your funds come from money that you can afford to spare for investment planning. The more funds you have at your disposal, the greater the amount of risk you can take. If you have only limited funds, you should be more careful while investing.
Your time frame: If you are ready to invest for a longer period, then you can invest in riskier investments like stocks, which have the possibility of giving higher returns in the long run. But, if you are looking for short-term investment options, then look for less volatile categories. Basically, ask your fund manager for options where you have the possibility of getting liquid cash at the earliest.
Your dependants: If you are responsible for a large family, then you need to take their needs into consideration before investing.
Asset allocation strategy and your risk profile:
Here are few points that can help you design your strategy-
Aggressive: In an aggressive asset allocation strategy, there are a higher percentage of investments in high-risk assets like equity. Usually you will invest more than 60 per cent of your corpus in such assets. This sort of aggressive investment tip is best suited to individuals who can afford to take higher risks.
Moderate: In a moderate asset allocation strategy, the proportion of lower risk investments such as debt-based options are increased, while equity plans are lowered. This type of investment strategy is best suited to individuals who can afford to participate in risky investments, but need to accumulate wealth for their dependants. Thus, there is a need to reduce their investment risk to some extent.
Conservative: This is an investment strategy that is focused on generating regular income and protecting your accumulated wealth.
It is important to understand how to assess and arrive at an optimal asset allocation to achieve financial goals and building wealth with minimum risks.
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