IN THE RIGHT PROPORTION

Asset allocation provides investors with the perfect blend of equity, debt and commodities in their investment portfolios

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Asset allocation is one of the important aspects of financial planning. Equity markets don’t always move in one direction; markets endure ups and downs. Similarly, even in debt and commodities (gold and silver ETFs), there are cycles of boom and bust.

Unfortunately, asset allocation is not accorded the importance it deserves. In the Indian market most portfolios are skewed towards one asset class. If investors are comfortable with equity, they will have 100% exposure to equity. Risk-averse investors will allocate heavily towards debt products. All this is done without factoring in risks and returns.

In order to benefit from such volatility, investors should have a proper asset allocation plan in place. Asset allocation means separating the portfolio in a fixed ratio across various asset classes, including equity, fixed income and commodities.

Asset allocation helps optimize the risk-reward ratio of a portfolio based on investors’ risk-bearing capacity, returns expectations and needs. Over time, asset allocation may diverge due to several reasons like a change in the value of your investment, new investments, redemptions, and so on. Rebalancing a portfolio periodically helps restore the desired asset allocation.

In the past few weeks, markets have been on the rise and valuations have also gone up. So, this is the right time to book partial profits and invest in debt funds.

In a cluttered freeway, investors can have their asset allocation model themselves and it is known as age-based asset allocation.

In such a scenario when the investor is young, there is a high exposure towards equities. And as his/her age increases, equity allocation moves down.