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Key Takeaways: The right way to go about investing is to devise a proper asset allocation strategy. Asset Allocation essentially implies investing money in different securities, in different proportions, to mitigate your investment risks. With proper asset allocation strategies, you can fulfil your investment goals per your risk appetite. Find out how to do asset allocation in this article.
An asset is any valuable thing or resource that helps you earn money. It grows in value over time and can be built by investing money in the right places. You can manage your assets by employing a sound asset allocation plan. Such a plan can help you achieve your financial goals while keeping your risk profile in check. Wondering what 'what is asset allocation'? This article can help you understand what it is and 'how to do asset allocation'.
Many new investors often question 'what is tactical asset allocation'. Asset allocation refers to a strategic plan to invest your money while simultaneously balancing the risks and rewards. Even if you are an experienced investor, the sheer number of investment options can cause confusion regarding the right avenues to invest in. An asset allocation is a financial plan you create to build your investment portfolio. You can create a diverse investment portfolio per your risk profile, investment horizons, and objectives through asset allocation.
Investments typically include assets such as cash, stocks, bonds, mutual funds and even real estate. The range of assets you own makes up your investment portfolio. Asset allocation is the plan that will help you assess how to mix your assets to create a portfolio that can offer you maximum returns.
Each asset offers you returns in different ways. Asset allocation helps you decide the investments that you should make to minimise risks. By creating an asset allocation strategy, you can determine whether you should invest in fixed-income securities, purchase equity, or other securities that can help you earn returns and grow your corpus. Analysing the risky assets and balancing them with fixed income assets is the fundamental point of asset allocation. It also helps you weigh out the long-term and short-term investments in your portfolio so that you can achieve your financial goals.
As an investor, you can employ different asset allocation strategies according to your requirements. Your risk profile should be a critical consideration while formulating your asset allocation strategy. You can also use online tools such as asset allocation calculators to analyse your risk-taking capabilities and weigh them against your investment capabilities.
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As the name suggests, age-based asset allocation depends on the age of an investor. The essence of this investment strategy is that you would be able to take higher risks and invest in equities when you are younger. Conversely, when you are older and have limited income sources, could opt for debt and fixed income securities. A general rule of thumb is to subtract your age from 100 to determine the ratio of equity to debt or fixed-income investments. Here is an example.
Suppose you are a 32-year-old devising an asset allocation plan. In this case, you would invest 68% of your funds towards riskier assets and allocate the rest towards fixed-income investments. Following this method is useful when investors approach their retirement age and need secure income sources. If you own riskier assets when you are younger, you can cover up your losses over time.
A Life-Cycle Fund is a mutual fund asset allocation strategy. The proportion of assets you invest in life-cycle mutual funds gets adjusted automatically as your age increases. In this strategy, the risk levels reduce as you begin approaching retirement age. In the initial stages, the assets are allocated towards more aggressive investments such as equities. This strategy gets reversed with time, and in the latter stage, asset allocation in fixed-income investments is predominant.
Formulating an investment goal is a crucial step as it helps you to allocate your assets strategically.
Your risk appetite also helps you decide whether to allocate your assets in equity or debt securities. Risky investments can lead to higher returns but can put your capital amount at risk. On the other hand, fixed-income assets generate stable, but lower returns and are ideal for conservative investors.
Determining an investment horizon or duration can help you fulfil your time-sensitive financial goals. Longer-term investments, wherein you reinvest your returns, can help you benefit from the power of compounding. This, in turn, leads to the creation of a bigger corpus.
Strategic asset allocation is a plan where you allocate your various assets with fixed individual targets. The objective is to achieve your investment goals within the specific investment horizons and earn decent returns. Just as it is essential to allocate assets wisely, so is it necessary to review your investments frequently. Upon achieving targets related to specific assets, you can rebalance your portfolio to align with your new goals.
Conclusion: With proper asset allocation, you can fulfil your financial goals and grow your wealth. Asset allocation does not follow any set rules or methods and depends on your personal goals and risk capabilities. If you understand the investment market, you can create your own asset allocation plan. If not, it is best to obtain the services of an investment advisor.
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*Disclaimer: This article is published purely from an information perspective and it should not be deduced that the offering is available from DBS Bank India Limited or in partnership with any of its channel partners.
The purpose of this blog is not to provide advice but to provide information. Sound professional advice should be taken before making any investment decisions. The bank will not be responsible for any tax loss/other loss suffered by a person acting on the above.