Asset Allocation

Heard of farmers cultivating a mix of crops in their fields? Ever wondered why they do it? What are the benefits? Well, the benefits are simple and aplenty.

When you cultivate a mix of crops in your farm, it helps improve your farm income from a variety of crops and protects you from the failure of a particular crop in unsuitable weather conditions. Consequently, cultivating the right mix of crops can yield better results.

Asset Allocation works on the same principle. Your portfolio performance depends on the mix of asset classes to a large extent. Selecting the right asset class mix is critical for the performance of your portfolio.

What is an asset and asset class? Why is asset allocation so important? Let’s find out.

Assets & Asset Classes

An asset is anything that has value such as cash, real estate, or even antique artifacts or art. In investing, similar assets are classified into asset classes. In India, the three key asset classes for investments are:

  •    Equity 
  •    Debt
  •    Cash

Other than these, there is real estate, gold, etc.

How should you divide your capital among these asset classes? What should be the percentage of each asset class? How do you determine the asset mix that is right for you? This is what asset allocation is all about.

Asset Allocation

Asset allocation is a portfolio investment technique that targets balancing risk by determining the proportion of capital spread across various asset classes. Each asset class behaves differently over time and has different risk and return profiles. Similar to diversification, it works on the basis that at any given time, the poor performance of an asset class could be offset by outperformance of another asset class within the investment portfolio.

There is no single formula that can determine the right asset allocation for you. A one-size-fits-all approach to asset allocation does not work as it depends on your risk profile and the time horizon you are looking at for your investments.

To invest wisely, it is important to determine your asset allocation depending on your investment horizon, investment objective, risk tolerance etc. It is advisable to seek an expert’s advice to determine appropriate asset allocation.

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