Importance of Asset Allocation

By allocating your money in right assets, you can balance the risk and reward of your portfolio.

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Importance of Asset Allocation

Asset allocation is the process of allocating your portfolio across asset classes such as equity, debt, gold, real estate, cash and alternatives. Ideally, asset allocation has to be based your investment time horizon and risk tolerance.

By allocating your money in right assets, you can have an investment plan that can balance the risk and reward of your portfolio while keeping your financial goals and investing time horizon in mind.

When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. The risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.

Benefits of Asset Allocation

Better Returns

Many individuals invest in an ad-hoc manner. Some investors are either too aggressive or conservative and invest accordingly - as a result, they are unable to earn adequate returns on their investments. Proper asset allocation will help you determine how much return you can expect on your investments based on the investment risks you are taking.

Minimizes Risk in Portfolio

Diversifying your investments dilutes volatility. Asset allocation ensures that portfolio risk is spread across different asset classes. Ex: investing in equity and debt will protect your portfolio from experiencing the impact of a market crash.

Make use of market crashes

Markets are unpredictable across short and medium terms. When market crashes, you can move your debt / gold investments into equity to make sure of the lower prices.

Asset Allocation Maintains Discipline

Asset allocation ensures the investor does not over-invest or under-invest in a particular sector. It fosters discipline and helps build financial security.

Key Takeaways

Asset allocation divides your hard-earned investment into various asset classes and gives you the potential to earn higher returns while lowering the risk by diversification. All asset classes don’t move at the same pace or in the same direction and that’s why having the right mix is important.

To conclude:

Markets are volatile by their very nature, they can plunge or rise like a phoenix at any time. The right asset allocation strategy will place your investment portfolio in a better position to help you deal with market dynamics. It will ensure that you get closer each day towards achieving your financial goal.


Manish Reddy

Co-founder, Investo