An Overview on Asset Allocation

The recent sharp volatility in the stock markets has retail investors worried, especially those who put all their funds into equity and completely ignored fixed income/debt and gold.

- Kalpesh Dave

Financial planners always insist that investors should always build their portfolios using an asset allocation approach giving importance to all assets. Mutual Fund Houses offer a number of schemes across equity, fixed income and gold, making it easy to build a portfolio using this method.

What is Asset Allocation? Why is it Important?

Asset allocation is deciding the allocation to equity, Fixed income, gold, international equity, REITS and cash - the most common components of an asset allocation strategy. This helps smoothen investment journeys by minimizing volatility and maximizing returns. There have been periods where equities have done well, there have also been periods where gold or debt investments have done better than equities. The goal of an investor should be to create a proper mix of these assets to ensure the volatility is reduced and reasonable returns are generated in the longer term.

Diversification is the basic premise of asset allocation as investable asset classes are decided based on goals and risks, and the need to mitigate portfolio volatility. The process also involves assessing your risk/return profile and then investing money in a certain proportion in asset categories that do not all respond to the same market forces in the same way at the same time.