Your questions about asset allocation answered.
Imagine that you’re sitting at a table with a pizza. However, there are six distinct sorts of toppings on the pizza, each with their own unique crust. Isn’t that something to be desired?
Consider the pizza as a portfolio of many investments. This is a concept known as asset allocation, and it describes how you’ve allocated your financial resources. There is a good chance that you will enjoy all of the different pizza slices, but when it comes to making an investment, you need to know exactly where and how much money you are spending. Investing based on a single person’s recommendation is dangerous, and we don’t want that to be the case for you.
Diversification reduces the risk of an investment by increasing the diversification of one’s assets. Equities, debts, and commodities all react differently to a given occurrence. During a certain period of time, one asset may outperform the rest, but other assets may not.
If you’re trying to figure out the correct asset allocation, here are a few things to ask yourself:
Is there a date in the future when you’ll require the money?
The answer to this question will help you decide where to place your money. If you need the money in the next two to three years, consider investing in debt mutual funds or other conservative options. The short-term volatility of the equity market makes it best to avoid shares. Long-term returns on equities markets, on the other hand, have been well documented. As a result, if you won’t need the money for at least five years, you should put more of your money into stocks.
What financial goals do you have in mind?
It’s also critical to think about your long-term financial objectives when determining your optimal asset allocation. Debt mutual funds, such as liquid funds, ultra-short term and short term funds, are ideal investments for short-term financial goals including saving for retirement. For your long-term financial goals, invest in equities funds.
How much danger are you willing to take?
So what happens if the value of your investment drops by 15% in one day? Equities are a better investment if you don’t mind watching your portfolio go from one extreme to the other. The mutual fund method, on the other hand, can reduce the risks involved with investing in stocks. High-risk investments have the potential to yield bigger rewards.
So, now that you’ve answered all of the questions, you may start strategizing your financial resources. As a matter of thumb, your equity allocation should be equal to 100 times your age. Equities should make up a quarter of your portfolio if you’re 25 years old. In general, the more equity you have, the younger you are. You can either increase your debt or decrease your equity as you get older. It’s because as you become older, your ability to take risks diminishes as well.
It’s also a good idea to keep a certain amount of cash on hand in case of an emergency (at least three months’ worth).
The following are some of the fundamentals of asset allocation: In addition, asset allocation does not end at equity, debt, or cash. Alternative investment funds might be included in the portfolios of experienced investors. HNI and UHNI investors are increasingly turning to this asset class. It has the potential to produce larger returns, even while taking into account risk. There are many different types of alternative investment companies and hedge funds to choose from.
Gold is one of the most common precious metals to be used as a hedge. When the stock market is in the red, gold performs better. Gold has become a must-have in the investment portfolios of HNIs due to global tensions and the ongoing depreciation of the rupee. Gold, on the other hand, should make up no more than 5% of an investor’s portfolio.
Investors can diversify their portfolios by investing in real estate. Investors can now purchase shares in a real estate investment trust in addition to traditional real estate investments (REIT). High-end commercial real estate can be purchased through REITs.
In the end, finding the best asset allocation strategy may not be as simple as it sounds because of the many variables at play. Financial goals, maximum returns, reduced risk and enough liquidity can all be achieved through prudent asset allocation. If you’re unsure about where to begin or just want more information, talk to your financial counsellor.