Our health requires proper mix of various food items to get us balanced doses of protein, vitamin, iron and other minerals in the body to remain physically fit and helping us fight health related risks. Same holds good for our financial wellness too, we need to diversify our money into various instruments by taking into perspective our risk taking ability, to enable us maximize returns thus wading the risk of sacrificing our financial health.
Studies have shown that proper asset allocation is more important to long-term returns than specific investment choices. But since guessing which asset category will do best at a certain point of time is very difficult, thus it makes sense to divide your investments among various asset categories. But right understanding of this strategy holds the key to investment success.
Here I will comprehend Asset Allocation for all you investors.
Asset allocation means diversifying your money in various asset classes. The goal is to help reduce risk and enhance returns. Establishing a well-diversified portfolio may allow you to avoid the risks associated with putting all your eggs in one basket.
Important variables affecting your Asset Allocation:
1. Prioritizing goals:
Prioritization makes it imperative that you have clearly earmarked goals. Time management teaches that you should prioritize your goals / objectives which will help you to analyze that you are working upon important goals instead of getting caught into minor things. This will make sure that your money is parked for significant purpose.
2. Risk Tolerance:
Risk tolerance depends on your age, income and financial goals. For instance, the risk which can be taken by a 30 year old cannot be taken by a person who is on the verge of retirement. As a 30 year old person generally has a longer time frame to make up for any losses he / she may incur on his / her portfolio.
3. Duration of goals:
Time Horizon is another crucial factor, which one should look at. Knowing that time horizon is extremely important when it comes to choosing the type of investments you want to make and asset allocation you want to do. As you need to take proper medicine for a particular duration to recover fast, similarly you need to fix the time horizon for a particular goal, so that you are able to build the desired corpus for that goal in the stipulated time frame. When you have longer time horizon, you can have aggressive asset allocation with more exposure to equity, but if time period is short then you cannot afford to do so.
I am sure that after keeping these aspects in mind you can have balanced asset allocation. But that�s no all, we still have one important thing to take into account, namely, Inflation. While doing all this exercise to grow our fund with best asset allocation by taking into account above mentioned all three variables, we should also consider inflation for the same. So that optimum growth of your corpus may is not in doldrums.
Returns also depend on your Asset Allocation:
For tenure of Investment - 10 - years and above:
| Assets | Allocation | Underlying Returns | Weighted Average Return |
| Debt & Equivalents | 30% | 8.00% | 2.40% |
| Equity & Equivalents | 70% | 15.00% | 10.50% |
| Gold Fund | 0% | 8.00% | 0.00% |
| Total | 100% | 12.90% |
Keeping other things same if allocation changes:
| Assets | Allocation | Underlying Returns | Weighted Average Return |
| Debt & Equivalents | 30% | 8.00% | 2.40% |
| Equity & Equivalents | 50% | 15.00% | 7.50% |
| Gold Fund | 20% | 8.00% | 1.60% |
| Total | 100% | 11.50% |
Looking at above example we can understand the importance of smart asset allocation to maximize the returns. But there is a twist in the story.
The allocation depends on the category of your portfolio, classified as:
Aggressive portfolio: This portfolio suggests that maximum portion is invested into equity say 70%, 20% into debt instrument and 10% into gold. Mostly this portfolio is recommended in case of longer time horizon.
Moderate portfolio: This portfolio implies that equity portion is 60%, debt portion is 25% and 15 % is gold. This portfolio would seek to provide regular income with moderate protection against inflation.
Conservative portfolio: This portfolio entails that equity portion is 30%, debt Instruments 60% and 10 % is gold. This portfolio appeals to people who are risk averse.
The question remains, how to select the category? So to answer that, as one joins the gym for physical fitness, same way it is advisable to opt proper guidance from Certified Financial Planner who is an expert and knowledgeable enough to help you to maintain sound financial health.
ApnaPaisa is India's leading price comparison site for financial products such as loans, credit cards and insurance plans . Author can be reached at www.facebook.com/apnapaisa
No comments:
Post a Comment