Skip to main content

Asset allocation is key to Investment success

MONEY is the fuel all we need to pursue our life's goals. Investing judiciously is one way to grow our hard-earned money at a healthy rate over time. Of course, one has to follow the right investment process to do so. Unfortunately, many investors start investing without determining their goals and the right asset allocation.

What they fail to realise is that while the portfolio's performance is important, its allocation or diversification over time is more significant.

Asset allocation is a strategy which allows an investor to choose from various asset classes such as equities, debt, real estate and commodities. Here's a look at what one needs to consider while weighing options.

Time horizon :It is the expected number of years one would be investing for. An investor with a longer time horizon would generally have the capacity to invest in riskier or more volatile asset classes as he can wait out the inevitable market ups and downs.

Risk tolerance: It is an investor's ability and willingness to take risks to achieve the desired results. An investor with high risk tolerance is more likely to risk losing money for better results. When it comes to identifying risks, most investors focus mainly on the market risk. There are a variety of risks:

Market risk: This is common to an entire class of assets. Consequently, the portfolio value may decline on account of economic changes or other events that impact the market place. Diversification and rebalancing the portfolio periodically helps manage risk.

Inflation risk: This involves the risk of losses resulting from erosion in income or the value of assets due to the rising costs of goods and services. It is a major risk in debt and debt-related securities.

Longevity risk: An investor might outlive his assets. Hence, it is necessary to design a portfolio having the potential to provide a positive real rate of return.

Behavioural risk: Many investors follow haphazard strategies when faced with uncertainties. This often causes substantial impact on their investment results.

Sequence risk: Even as having a financial plan and following it in a disciplined manner helps, one can still experience a market downturn just around the completion of one's time horizon. Therefore, it pays to start protecting gains by altering asset allocation of the long-term goals in a phased manner, say around 12-18 months, before the target date.

While asset allocation is the key to investment success in the long run, it is equally important to choose the right options to get the desired results. Several factors such as variety, flexibility, liquidity, tax efficiency and transparency need to be considered in the selection process. It is here that an investment option like a mutual fund scores over most others.

Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now