Asset allocation is an investment strategy that intends to balance risk and return by allocating a portfolio’s assets based on an individual’s goals, risk tolerance, investment horizon and market opportunities.

Most financial professionals agree that asset allocation is one of the most important decisions an investor can make. Several research reports suggest that 80%-90% of the portfolio(s) returned by the investor is dependent on asset allocation. This means, the selection of individual securities is secondary to the way assets are allocated.

A comprehensive asset allocation includes real estate, equity, fixed return instruments, gold. Financial instruments asset allocation are domestic equity, international equity, fixed income. (Can do micro asset allocation with individual asset class. For example select Large-Mid-Small cap, Sector wise, etc for Equity asset)

importance of asset allocation

The purpose of asset allocation is to reduce risk through diversification by combining different types of investments that perform differently during different market conditions. A multi-asset approach helps reduce risk in terms of annualized volatility and downside and eases the return path. By doing this one can build a balanced portfolio that helps to stay on track and achieve one’s goals.

Different types of asset allocation

There are a variety of strategies from the point of view of their basic management approaches for determining asset allocation.

• Strategic Asset Allocation – Strategic allocation is a long-term asset allocation, tailored to the risk profile and financial goals of the investor. This method establishes and follows a comparative combination of assets based on expected rates of return for each asset class to reduce risk and improve returns.
• Tactical Asset Allocation – Tactical asset allocation sometimes involves short-term, strategic deviations from the mix in order to profit from unusual or extraordinary investment opportunities. This flexibility includes the factor of market-timing for the portfolio, in order to generate higher portfolio returns.
• Consistently Weighted Asset Allocation- This approach involves regularly rebalancing your portfolio. For example, if an asset falls in value, he will buy more of that asset. And if that property value goes up, someone will sell it.
• Trend Based Dynamic Asset Allocation – This strategy is the opposite of a constant-waiting strategy. For example, if the stock market shows a shortfall, someone else sells the stock in anticipation of a shortfall and if the market is strong, one buys the stock in anticipation of a sustained return in the market.
• Insured Asset Allocation – With an insured asset allocation strategy, a base establishes a portfolio value under which the portfolio should not be allowed to fall. Active management is exercised with the intention of maximizing the portfolio value as long as the portfolio generates returns above its base.

One can combine two or more strategies, for example strategic allocation suggests 50% in equity and 50% in debt, but within equity, the strategic allocation to equity may change 30%-70% depending on the opportunity. Is.

One of the most important components of following a strategy is to rebalance it from time to time. The asset allocation can be changed not only by primary buying and selling, but also by adding new capital to an asset to rebalance the allocation.

How to Build a Strong Risk Reward Balanced Portfolio Through Asset Allocation?

• Take an inventory of your current assets: With the markets constantly changing, it is easy to lose track of where your current assets are invested. Set your financial goals: Set your short term and long term goals.
• Identify your risk profile: Recognize your risk taking ability. Are you risk averse or are you willing to take more risk with the potential for higher returns?
• do your research: Now, it is time to decide where you want to allocate your assets.
• Together Variety of Mutual Funds, bonds, stocks and alternative holdings, it can be great to choose investments that best suit your specific needs, especially in a volatile market. Allocation approaches that require feedback on market volatility require the expertise and talent to use specialized tools to calculate these movements.
• financial professional Are proficient in understanding the ever-changing market and can help you build a balanced and diversified portfolio adapted to your financial situation.

Views are personal: The author is Salil Kothari of Cyclo Investments

Disclaimer: The views expressed are those of the author and are personal. TAML may or may not subscribe to it. The views expressed in this article/video are in no way intended to predict or time the markets. The views expressed are for informational purposes only and do not imply any investment, legal or taxation advice. Any action taken by you based on the information contained herein is your sole responsibility and Tata Asset Management will not be liable in any way for the consequences of such action by you.

Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.

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