Asset Allocation
As one may be aware there are different asset classes in personal finance; namely
- Fixed income/debt which means one is likely to earn a fixed return on the investment
- Equity which stands for owning a stake in business. This asset class typically has highest risk-return ratio.
- Real Estate means owning a land/plot.
- Gold
- Alternate Investments like Commodities etc.
One needs to remember that if one has invested in different asset classes that only means one has diversified but may not have done proper asset allocation.
Majority of us are always skewed towards one class of assets.
Asset Allocation is the act of spreading your investments percentwise across different asset classes based on your risk appetite, financial goals, age and investment time frame.
Typically, there is negative correlation between the asset classes. For e.g., when Equities are not doing well, typically gold does well. Hence it is very important to look at asset allocation.
Recent study points out that portfolio return is attributable largely to portfolio mix over market timing.
Process of determining right percentage of assets in the portfolio is personal and depends largely upon time horizon, age, risk tolerance.
There are various strategies for asset allocation like strategic asset allocation or tactical asset allocation or dynamic asset allocation etc. and one needs to consult one’s financial advisor to select the suitable one for self.
