Asset Allocation is Important

All of you have probably a long list of financial goals, but it would not be so easy for you to fulfill all of them at once. Whatever may be your goals, it is important to know all of them, be it a beautiful house, a new car or dream vacation. With clearly defined goals, you would be able to achieve whatever you dream. In order to fulfill your dream, just earning and savings are not sufficient, but you need to invest your money properly by choosing the right investment option. Many people find mutual funds are an ideal way to fulfill their dream and build wealth. However, before investing in mutual funds, you must know how to pick up the right investments from thousands of mutual funds, stocks, and bonds. A seasoned mutual fund investor opts for a mix of mutual funds, equities, and bonds instead just picking up a few stocks to build wealth. He knows the investment portfolio technique of asset allocation. This article will try to explain the importance of asset allocation and how it benefits the investors to achieve their short, mid and long-term financial goals.

Get an idea about asset allocation

Asset allocation is a technique to make a great investment portfolio that reduces risk by dividing the assets among different asset class such as stocks, bonds, real estate, gold etc. An experienced and efficient investor distributes his investible surplus among different asset classes like debt, equity, real estate, gold or sometimes in cash for adopting an investment strategy to reduce or balance his or her portfolio’s risk. Before asset allocation, you must keep in mind your financial goals, risk profile, and the investment horizon of your investment.

Benefits of asset allocation

As an investor, you must think of how much you need to save and invest to meet your financial goals. The amount that you invest to achieve your financial goal is important as you invest it for fulfilling the comforts of tomorrow by sometimes sacrificing the luxuries of today. So, you need to put your hard-earned money into different asset classes by following the strategy of asset allocation. It helps you to achieve higher returns in the long-term by reducing the risk factors by diversification. Here are the benefits of asset allocation in mutual fund investments.

• For high returns on investments

An individual who invests in an ad-hoc manner cannot generate wealth as he or she dreams and makes it difficult for him or her to decide whether the return on investment is sufficient to meet their long-term and short-term goals. You can determine the return on investments based on the investment risks you are taking if you opt for asset allocation.

• Minimize risk on investments

As an investor, you will make your future investment decisions based on your willingness to take the risk or past experience. If you have good investment experiences in the past, it is wise for you to follow a good asset allocation strategy for achieving your financial goals. It shall be an effective way to minimize the risk of your investments and ensure more certainty to fulfill your financial goals.

• Encourage long-term investing

One of the great features of adopting the strategy of asset allocation is that its capability to control the long-term appearance of your portfolio.  Its makeup should not get changed based on market conditions or economic situations. Your allocation may change based on the changes in your age, progress towards financial objectives, and your financial situation.

• Provide a systematic approach to diversification

Diversification is another name for asset allocation, which is a helpful strategy to reduce the risk of your portfolio. Market factors and economic situations affect different investments differently. So, it is wise to adopt the asset allocation strategy to reduce the chance of adversely affect your portfolio by a certain risk type.

• Helps to make better investment decisions

Adopting an asset allocation strategy also helps you to stay away from investing in assets that will not help you to fulfill your financial objectives. The framework that you get through asset allocation helps you to make better investment decisions.

Factors to determine your asset allocation strategy

A period review of your portfolio and its rebalance is essential for the success of the asset allocation strategy that you have adopted. It is wise to set ranges for your investment categories and rebalance your portfolio when any of these categories fall outside of the ranges that you set. Even though there is not any set formula for adopting an asset allocation strategy, it mainly depends on some factors. Some of them are:

• Risk tolerance

You can adopt an asset allocation technique based on your willingness to take market risks to get potential in the long-term investment.

• Time horizon

Another factor for determining your allocation strategy is the period for which you stay invested without selling or withdrawing your investment.

As an investor, you must know the importance of asset allocation and how you spread your money across different asset categories like debt mutual funds, equity mutual funds, and cash. It is an effective way to maximize your returns while minimizing its volatility. An investor allocates his assets to reach his financial goals based on different factors like his age, financial objectives, risk-taking capacity, and lifestyle. You must take periodic portfolio rebalancing to review your asset allocation strategy. And rebalance your portfolios if the success of its plan moves up or down by 10% of the targeted allocation for achieving better returns.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh