How often should one go for a review?
Asset allocation plays an important role in the success of any financial plan. Investors should review it at least once every quarter or in six months. If any asset moves up or down by more than 10% of the targeted allocation, a rebalancing of the portfolio can be considered.
What is asset allocation?
Asset allocation is the process of deciding how much money to allocate across asset categories such as equity, fixed income, gold and cash — the common components of an asset allocation strategy. Asset allocation helps you smoothen your investment journey by minimising volatility and maximising returns. This also helps you split money among asset categories that do not all respond to the same market forces in the same way at the same time. Asset allocation will vary from one investor to another and will be determined based on your age, lifestyle, goals and appetite for risk. For example, a conservative investor will be told to hold 40% in equity mutual funds, 50% in debt mutual funds, and 10% in gold funds.
How does one use mutual funds?
Asset allocation can be done using a combination of mutual fund schemes. Typically, before making investments, a financial planner or wealth manager suggests asset allocation based on the understanding of the investor’s profile and risk-taking capability. For example, an aggressive investor with a Rs 10-lakh portfolio could have 60% allocation to equity mutual funds, 30% to debt mutual funds, and 10% to gold funds. Within equities, it could be split in such a way that half of the equity allocation goes to a passive large-cap index and the balance to a mix of mid-, small-cap and thematic funds. In debt, it could go to a mix of ultra-short and duration funds, while the balance could go to a gold ETF or gold saving fund. Investors could also combine hybrid funds to meet this allocation. The movement of these funds is monitored regularly. After a year, due to a rise in the stock markets, equity mutual fund allocation could rise to 70%, then it should be brought back to its original level of 60% by switching some equity funds to debt and gold.
Why is it necessary to follow asset allocation?
It is difficult to predict when equities will show growth and when there will be a correction. So, when equities go down, and you have all money in that asset class only, you will be hit hard. However, if you have allocated to gold and debt, they can protect portfolios. Hence, spreading wealth across assets gives the best risk-adjusted returns. Wealth managers believe in the long term, 90% of the returns come from proper asset allocation.
