Source: Steve Buissinne from Pixabay 

There is a very old proverb, Don’t put all your eggs in one basket. This implies to our investments also. If we invest all our money in one Asset Class whether it’s Equity or Mutual Fund Properties or any Other Investment option, our portfolio may sometimes face the repercussions of Market instability in the future. So, for a new Investor or for any investment Asset Allocation is very important because it will help to enhance the returns and also manage the risk. Let’s discuss the recessionary period of 2007-09 when the equity market in many countries performed badly but gold prices went up. Thus if an investor who has invested in both gold and equity earned better returns as compared to an investor who has invested in either gold or equity. So, this distribution of Investor portfolios in different Assets classes is known as Asset Allocation.

An effective Asset allocation is one which is a combination of Equity, Debt, gold, and cash. Proper Investment Strategy and Asset Allocation allows the portfolio to benefit from the higher returns of the Asset class which finds the prevalent economic condition favorable to their performances and reduces the risk of being invested only in an asset class. There are four steps to creating a Portfolio.

Prepare a Blueprint- For preparing a perfect Portfolio, we should enquire about the goal, Time horizon, and Risk appetite of the investor. The longer the time horizon of the investor, the more should be tilt towards equity.

Decide on an Asset Allocation- Let’s take an example of a 23 years old boy who has just started saving Rs. 2000/- per month for his retirement. In that case, the entire amount should be invested in diversified equity funds.

Discover what you already own- Before designing a portfolio we should check out the details of the previous investments in equity or mutual funds (ageing-wise). How do they work together and what is your core investment? Is the investor’s previous portfolio diversified or has a lot of overlaps? We note all the investments in a spreadsheet and calculate how much an investor should have in various Assets with the Human Advisory Skills instead of Robo advisory.

Being it all together- We should check for “Holes’ ‘ in your portfolio and fill them up. For example, if a client has 3 large-cap growth funds and they are not equally good. Before selling, we should ensure that the units are held for a year at least to avoid Short term Capital Gain Tax. If a client has all his savings in NSC, PPF, EPF, & Bank deposit, ensure future savings into equity attain a balance.

There are three types of Asset Allocation which are often used to build an asset allocation Portfolio viz Strategic, Tactical, and Dynamic Asset Allocation.

Strategic Asset allocation- In most of the Goal-based planning Strategic Asset Allocation is aligned with regard to their ability to take risks need for growth, income or capital protection, and investment horizon using a questionnaire like Financial Need Analysis Form, Risk Profiling Form, or other financial tools. It is a Long- term plan that is reviewed periodically for continued relevance to the individual’s goal or situation. The Allocation will not be increased on the basis of the expected performance of the asset class. The portfolio will be rebalanced periodically so that the allocations to various asset classes, that may have changed over time due to their performance, are brought back to what was originally envisaged.

Tactical Asset Allocation- Tactical Asset Allocation is the decision that comes out of calls in which an investor decides to go overweight on equities. This allocation is suitable only for seasonal investors who are Aggressive as per the Risk Profiling. But the major portion of the portfolio would be aligned to Strategic Asset Allocation.

Dynamic Asset Allocation- In this type of Asset Allocation, we use pre-defined models to allocate assets among different asset classes. It removes the subjective elements from asset allocation decisions.

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