Asset allocation is a strategy that involves dividing your investment portfolio among different asset classes such as equities, bonds, commodities etc. The goal of asset allocation is to minimize risk and maximize returns by diversifying your investments across different asset classes.
Steps to Practice Asset Allocation
Determine your investment goals and risk tolerance: Before you can begin to allocate your assets, you need to determine your investment goals and risk tolerance. Consider factors such as your age, income, investment horizon, and financial goals.
Choose your asset classes: Once you have determined your investment goals and risk tolerance, you need to choose the asset classes that you want to invest in. This will depend on your personal preferences, investment objectives, and risk tolerance.
Allocate your assets: Once you have chosen your asset classes, you need to determine the percentage of your portfolio that you want to allocate to each asset class. This will depend on your investment goals, risk tolerance, and the current market conditions.
Rebalance your portfolio: It is important to periodically review your portfolio and rebalance your assets to maintain your desired allocation. This means selling assets that have become overvalued and buying assets that have become undervalued.
Monitor your portfolio: Finally, it is important to regularly monitor your portfolio and make adjustments as needed to ensure that it remains aligned with your investment goals and risk tolerance.
While all of these seem easy, undertaking each of these activities is a time consuming act. Moreover, one will have to overcome one’s own behavioural biases to get the allocation and rebalancing right. For an investor who are not very well versed with market landscape, the simplest way to use the asset allocation technique is through asset allocation funds.
What are asset allocation schemes?
Asset allocation are those which allocated investment across different asset classes. Within the mutual fund offerings, investors have the option of investing into equity and debt asset classes through dynamically managed asset allocation schemes. In case if one wished to take exposure to more asset classes like gold, REITs etc. then an investor may consider a multi-asset fund. In each of the options, the allocation to the various asset classes is not static in nature.
Dynamic asset allocation funds adhere to a 'buy low and sell high' methedology. Here various fund houses have different approached to managing their allocation. Some fund houses are known to make model-driven decisions while several others use market parameters like price-to-book and the likes to reach an allocation/rebalancing decision. In this category fund, this switch between equity to debt or vice versa may be carried out on a daily, monthly or even on a quarterly basis, based on the mandate of the fund.
Regardless of whether you choose equity or fixed income, based upon on your investor profile, mutual funds as an investment choice gives you the advantages of diversification, low cost and professional management. It could therefore be a sensible strategy to add the taste of dynamic asset allocation funds to your investment portfolio as these funds strive to deliver reasonable returns, while limits the effects of market volatility on your portfolio by following the principle of asset allocation.
These products are appropriate for first time investors with little or no knowledge of the market places. Given that nature of funds, these can be considered for lump sum investment as well, irrespective of the market conditions as the fund manager here will be the needful in terms of allocation across multiple asset classes. Historical trends, suggest that adhering to asset allocation matters more than any other step. However, investors stress more on aspects like security selection, portfolio churning, timing the market etc. which over the long term tends to be a futile exercise.
To conclude, just like small but consistent investments matter in the wealth creation journey, adhering to asset allocation is the cornerstone of a healthy portfolio. Hence, straight out your asset allocation first and then move on to investing accordingly.