INSUBCONTINENT EXCLUSIVE:
With macros looking weak and stock market indices at a new high, financial planners believe it is important for investors to follow the
principle of asset allocation.
1
What do you mean by asset allocation Can even a small investor follow itAsset allocation is the process of deciding how to spread your
investable money across various asset categories such as equity mutual funds, debt mutual funds and cash
Using this principle, investors can minimise volatility and maximise their returns
The process involves dividing your money among asset categories that do not all respond to the same market forces in the same way at the
Asset allocation could vary from one investor to another
It is determined based on your age, lifestyle, goals and risk-taking appetite
For example, an young and aggressive investor can hold 75per cent in equity mutual funds, 20per cent in debt mutual funds and 5per cent in
gold.
2.
How does an investor decide what his ideal asset allocation should beBefore beginning to make investments, a financial planner
For example, an investor holding a Rupees 10-lakh portfolio could have 75per cent allocation to equity mutual funds, 20per cent to debt
products and 5per cent to gold
While this is the starting point, this needs to be tracked regularly
After a year, if due to a rise in the stock markets, equity mutual fund allocation rise to 80per cent, it should be brought back to its
original level of 75per cent
This is necessary as otherwise if equities fall due to an untoward event, it could result in a higher loss to the portfolio
Wealth managers said sticking to an asset allocation plan is crucial to achieving financial goals
This approach reduces risk on the portfolio too
Typically when equity in the portfolio goes up, it can be brought down by switching some equity funds to debt funds
Similarly, when equity allocation falls due to a fall in the market, it can be increased to his original allocation by switching from debt
What are the benefits of following asset allocationIt is difficult for any individual to predict which asset class goes up when or to time
For example, equities may be up, while debt may be down and vice versa
However, if you have your wealth spread across assets, you will be less hit and get the best risk-adjusted returns
Wealth managers believe in the long term, 90per cent of the returns can come through following the principle of asset allocation.
4.
How
often should one review asset allocationAsset allocation is sacrosanct to the success of any financial plan
Investors should review it at least once a quarter
If it moves up or down by 10per cent of their targeted allocation, investors should rebalance their portfolios.
