Investors, usually, spend a lot of time in deciding which asset class to invest in. In that process, asset allocation is given little attention.
Asset allocation is a process of 'consciously' spreading your investments across various asset classes. The objective is to balance risk by diversifying your portfolio.
All eggs in one basket?
Diversification is the key! In all probability, you would have invested some money in direct equity, mutual funds, public provident fund, gold and bank deposits. But it is important to know the exact proportion of your investments in each asset.
For example, we succumb to current market sentiment. It was equity sometime back. Now, it is bank fixed deposits. So, in all probability, you might find the percentage of money invested in the above mentioned assets have gone up substantially as compared to equity and equity funds over the next year or two. This sub-optimises your total return.
Buy low sell high
Now, if a tailor made, suitable asset allocation strategy were in place, it would have indicated that rather than going overboard on bank deposits, during current times, you should actually be adding a little to your equity portfolio.
Tips: Stick to your allocation pattern. It would discipline you to buy low and sell when the market picks up.
This is the right time to appreciate the importance of asset allocation. While equities have fallen, safe assets such as gold are glittering. This happens because each asset class has different levels of return and risk and therefore, will behave and react differently to a given market situation. So if equities rise, gold would in all probability will be flat and if equities fall, safer assets like bonds and gold would pick up.
Comments
0 comment