Skip to main content

Asset Allocation in Investing

Download Tax Saving Mutual Fund Application Forms

Invest In Tax Saving Mutual Funds Online

Buy Gold Mutual Funds

Leave a missed Call on

94 8300 8300

 

 

What is Asset Allocation?

In simple terms asset allocation is dividing the investment amount among different unrelated investment asset classes with a goal of minimizing the volatility and optimizing returns. Unrelated assets mean those which do not respond to the same market forces in the same way at the same time. This may lead your investments to gain on one front when the other side is losing (however there's no guarantee to it).It is just like having a balanced diet with a goal of taking all nutrients our body requires to stay healthy. Asset allocation is must to keep your investments healthy. With a lure of earning more return one has tendency to move into more of stock market investments in bull market phase but this portfolio starts bothering in volatile phase. In volatile environment investors tend to move towards safe assets but under high inflation scenario and low post tax return they could not achieve their goals. So having a proper mix of different asset classes is what one requires. For e.g. 2 years back everyone wants to buy more and more gold, and these days everyone feels that Stock market is the only place to make money.

How to decide Asset Allocation required?

The common misconception among people is that they decide the suitable asset allocation as per their Age. Well, this is not only their fault…many advisers or investment houses also works in the same fashion. They say 100 minus age is what you should have in equity (aggressive) and remaining in debt (Defensive). But this is the wrong strategy. I believe even 70 years old person can have a risk tolerance of investing 80% in equity if he's having arrangement of regular income and have surplus fund available with him with no goals targeted. So believing on "age funda" for asset allocation may prove to be lethal for investments.

See asset allocation is a factor of your risk profile. Risk profile is something which tells how you generally react to different market and real life situation. Your perception towards an investment might change for short term but your inherent behavior towards risk will always remain same.

Other factor that affects your asset allocation is the goals targeted. Even if you are high on risk tolerance but your goal is just 2 years away then there's no point in going for aggressive allocation

How to determine your own asset allocation

1. Understanding different Asset classes- This is the first and very important point. One has to understand that in India there are only 4 asset classes to invest in. Equity, Debt, Gold and Real estate. Equity and Real estate comes under aggressive and volatile asset classes whereas Debt and Gold is somewhat safer and less volatile. All these asset classes can be invested in directly or through Mutual funds or Portfolio management route. Even Insurance ULIPs provide you exposure in different asset classes. So whatever investment instruments you have, you have exposure to these 4 asset classes only. For e.g. If you have 4 endowment/money back insurance policies, PPF a/c. bank and corporate fixed deposits, NSC, Infrastructure bonds, tax free bonds etc. All this collectively result in your debt allocation.

2. Understanding your Risk profile – As I wrote above, your risk profile doesn't just come out of your age, it is how you generally reacts to different situation. Are you in a habit of taking chances with your money, at what speed you drive your vehicle- do you wear seat belts, do you use mobile phone while driving, do you favor a fixed salary with less bonus or low salary with high bonus etc. All these real life instances collectively form your risk tolerance attitude in investments. Risk profiling is like knowing one's blood pressure level and thus sensitivity to volatility. Doing a proper risk profiling is one of the regulatory requirements for SEBI registered investment advisers which include many banks too. So if you are dealing with a registered adviser he will take care of this part.

3. Knowing your goals – Relying totally on your risk profile sometimes may not be the right strategy for you, but it doesn't even mean you can ignore it. As the ultimate requirement is to achieve the goals comfortably so as you reach near to the goal you should move from aggressive to conservative. If you have invested heavily in equity or real estate for a goal targeted, then you should be out of these assets at least 2-3 years before the target year…even if you are very bullish on market performance

When should Asset allocation be rebalanced?

Over a period of time, with the adding on of capital gain or interests you will find that the ratio of your allocation has got changed. You may find yourself again high on equity or high on debt. So timely rebalancing of your investments allocation is very important. You can do the rebalancing by selling one asset class and buying the other with the same amount, or if you have surplus funds available with you, you may make some additional purchase in the asset where the value has gone down.

Lets understand this with example:

Say you have Rs 5 lakh with you as surplus available and after going through the risk profiling process your advised asset allocation comes out to be 60% Aggressive and 40% defensive.

The above chart shows that now to rebalance the allocation suitable to your risk profile, you need to sell Rs 10200/- of equity and buy Rs 6900/- and Rs 3300/- of debt and gold respectively.

Next Year-

This calls for buying Rs 28793/- of equity and selling of Rs 22432/- and Rs 6361/- of debt and gold respectively.

You have to repeat this process after every particular interval, which may be 1 year or 3 years. This rebalancing process will keep the volatility intact as per your acceptable risk tolerance and also help you in buying low and selling high.

If this was not the process you follow then you would have bought more of equity in Year 1 under the lure of high returns as stock market was performing good and next year, you would have lost big money.

Conclusion:

Determining an asset allocation is a very important financial decision, more important than selecting right investment product, as this will have more impact on your overall portfolio return. And be sure to periodically review your portfolio to ensure that your chosen mixes of investments also have diversified among different sectors.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund

2.Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...
Read more

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...
Read more

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Read more

Term insurance

Term insurance may not be the most-marketed product by life cos, but it’s a must-have in today’s risk-prone lifestyle WHEN was the last time your insurance agent sold a term plan to you? It’s not a very popular policy among agents, as their commission in absolute terms is low because of the low-premium. Just as agents have their self interests in mind while selling, you need to make your own decision about your insurance needs, which are unique to your family. COST ADVANTAGE A term plan is pure protection. It is the cheapest type of life insurance policy. But what you see might not be what you get, most insurers have a range of health parameters for standard rates. If any of your health parameters — weight, blood pressure for instance fall outside this range, you will pay more. For some companies, the standard range is very narrow. EARLY BIRD GAINS A 30-year-old will pay 15% more premium than a 25-year-old. At 40, the premium is double of what is applicable for a 25-year old, points...
Read more

Stock Dividend Yields

During a bull run, it’s very easy to ignore stocks with high dividend yields. After all, what could be more enticing than a growth stock? But in times of crisis, these boring ones tend to be the most sought after. The reason being that not only do dividends provide a cushion when the market is in the doldrums but such stocks also tend to fall less. The lure of dividend yield stocks is not easy to ignore. These stocks offer capital appreciation as well as cash payments. But logically, any company that pays a substantial portion of its earnings in dividends is reinvesting less and, therefore, would grow at a slower pace. So the trade-off is between higher dividend yields for lower earnings growth. On the other hand, companies with high growth potential and volatile earnings tend to pay less by way of dividends, if at all. Such companies would rather reinvest their earnings to sustain their growth. The capital appreciation of growth stocks is obviously higher than in dividend yield ones. ...
Read more
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