How do I decide my asset allocation

Ishaan has been investing in equity funds for quite some time. Now, he wants to decide the asset allocation for his portfolio. Here is some advice.

Ishaan, a 38-year-old software engineer, has good experience in equity investments. As of now, he has been able to accumulate about Rs 10 lakh in equity funds. His goals include saving for a comfortable retirement and the higher education of his five-year-old daughter. Recently, he has read an article on asset allocation and has understood its importance to some extent. However, he is unsure about the appropriate asset-allocation plan for him. Also, he wants to know when and how he should change it over a period of time. Here is what he needs to know.

WHAT IS ASSET ALLOCATION? WHY DOES IT MATTER?

• Asset allocation means dividing your portfolio in a definite ratio across various asset classes, including equity, fixed income, commodities, etc. It helps in optimising the risk-reward ratio of the portfolio based on one's risk tolerance, return expectation, and needs. For example, a conservative investor can have a higher allocation towards fixed income to protect the value of his investments during a market crash. But at the same time, he will have to compromise on the return (rewards) when the market rises significantly

• Over time, your asset allocation may deviate due to several reasons like a change in the value of your investment, new investments, redemptions, and so on. Rebalancing your portfolio periodically helps restore the desired asset allocation.

HOW TO DECIDE YOUR ASSET ALLOCATION

Your desired asset allocation can depend on many factors. Here are the key factors and how they apply to Ishaan's case.