Significance of Asset Allocation

When it comes to matters related to investments, asset allocation is one aspect which you cannot overlook. Asset allocation is the practice of investing one’s money across various asset classes such as equity, debt, real estate and commodities, etc. on the basis of one’s goals, risk appetite and investment horizon.

- Rahul Grover

This approach fundamentally aids in minimising risk and optimising investment returns. It works on the often said premise of ‘don’t put all your eggs in the same basket’. Given below are the five reasons which make asset allocation a non-negotiable aspect on one’s investment journey.

Diversification Minimises Risk — Adhering to asset allocation ensures that your portfolio is diversified across multiple asset classes. Each asset class is influenced by different factors. So, even in case of an extreme development in one asset class, the portfolio is not adversely impacted, thereby helping minimise the risk to the portfolio. For example, during the initial phase of the pandemic, Indian equities had faced a sharp correction. At the same time, debt was relatively unaffected while gold rallied as investors globally opted for safe haven asset classes. If a portfolio predominantly consisted of equities, it would have been badly affected but if it was diversified across asset classes then the downside risk would have been relatively lower.