All About Asset Allocation

We all have heard about 'Asset Management' which is a tool towards building profitable investments. But what is it exactly? Sometimes, things are just given complicated names and then, they seem like incomprehensible rocket science to us. Wouldn't all of us be happier if we were just told that 'asset allocation is basically the way we distribute our savings amongst various financial tools or instruments so that we end up beating inflation and improving our standard of living'?

So what exactly is asset allocation?

In asset allocation, we choose how to divide our savings (assets) and invest them in gold, equities (that is stocks and shares), property and other fixed investment options like fixed deposits and government saving schemes.

Hence, instead of putting all our eggs in one basket, we use different baskets promising us different amount of returns and with different risk profile. Say, for example, stocks and fixed deposits. While stocks usually have the potential to give better returns than fixed deposits, they also carry the greater risk of a permanent loss of capital.

Thus, through asset allocation, we reduce the risk of a permanent loss of capital and at the same time, increase the odds of stable risk-free returns.

Only we know where our shoe pinches us

We are unique and so should be our investment profile (showing where our assets are invested). If an asset management strategy is good for our friend, it does not mean that it will work for us too. Only we know what we expect from our investments, so we should invest accordingly.

Depending on our age and willingness to take risks, we must use a mix of equities, gold, fixed deposits and property to match our investment profile.

We must ask ourselves the following questions before we finalise how to invest our precious savings:

1. Do we want to be on safer side?
2. Is our family dependant on our income?

If the answer to both these questions is a resounding 'yes', then we are a 'low-risk' investor. If the answer is 'no', then, we are a 'high-risk' investor.

Our age also has a big role to play in our risk-taking capacity

"Remember when you were young, you shone like the sun".

When we are young, we are usually willing to take more risks, or are ready to experiment.

In case of asset allocation, this means, we are willing to take more risks in our early twenties as long we feel the end result is worth all the trouble. The risks should justify the promised returns.

Hence, we should invest in equities if we are a high-risk investor with no financial family obligations. We can allocate a higher proportion of our income/savings (say around 60%) to equities. Since we are taking a high risk approach, restrain it by investing the rest of the money in fixed deposits and gold – the safer options with steady returns.