Why A Good Strategy Is Key To Your Asset Allocation
The well-known children’s fable – the ant and the grasshopper, has a great lesson even for grownups. Let’s think of summer as salaried days, achieving a personal goal or good health; if we, just like the ant, make the most of it by saving in anticipation for the harsh winter, which could be a sudden health crisis, an unexpected expense, or crushing debt , then we will be ready to face it. Unlike the grasshopper. While the moral of this story is important – that it is smart to save as much as one can during days of abundance – it is equally important to remember that your personal finance story shouldn’t end with just saving money.
Jul 2022
5 mins read
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Deciding where and how to invest those savings is crucial. And that’s where strategic asset allocation comes in.
Choices we make for strategic asset allocation
Your investment journey requires as much thoughtful planning as picking a career. Both are long-term endeavours that demand research and patience and, if done right, can earn you sizable, steady returns. Your goals (the destination) determine your investment choices (the route). The milestones may vary from an emergency fund to an upcoming vacation, further studies, purchase of car/house, planning a wedding or creating a retirement corpus.
Strategic asset allocation is about accounting for your age and risk appetite when planning the financial investments that will help you meet your short- and long-term goals.
So, what are the investment avenues available to you? Asset classes can be of the following categories:
- Equity
- Fixed income/debt
- Commodities (Gold/precious metals)
- Currency/foreign exchange
- Cash
- Real estate
- Alternate investments
Each of these asset classes react differently to world and market events. Therefore, depending on your risk appetite, diversifying your exposure to various asset classes can help you protect your wealth against market ups and downs. Typically, at the beginning of your career, you have time on your side to build wealth, so you can afford to take some investment risks; with age, you should become more conservative with your investment choices.
For a young investor with a moderate risk appetite, a large chunk of the portfolio can be equities, which are more volatile than debt instruments. However, since the performance of your overall financial portfolio cannot depend solely on you timing your investments to the highly unpredictable movement of the market, responsible asset allocation becomes important. As most young investors lack the time and the expertise to research potential investments, mutual funds offer the affordable benefit of having professional investment experts manage your money.
Fund houses offer products that help you make investment choices based on your age and risk appetite and with these products, you get the benefit of professionals managing your money along with the ability to re-balance your portfolio every few years to keep it in sync with your age.
Test case
Say, you have a moderate risk appetite and are on the lookout for mutual funds to invest a small part of your current salary. Since your requirements dictate your investment portfolio, the ultimate goal you are saving for will determine your choice of a mutual fund. If you’re planning your retirement corpus with an investment horizon of 30 years or so, that’s a long-term goal where you can afford to work out an aggressive investment plan.
Perhaps, being a novice investor, if you feel more comfortable limiting yourself to mutual funds, you could look at equity mutual funds that potentially offer sizable returns over a long time frame, and have the potential to grow your money better vis a vis inflation. More importantly, a longer time frame also means you have better chances to weather market risk and volatility. Shorter-term goals like purchasing a car may need you to pick a more conservative debt mutual fund, where the overall returns are comparably lower since the market risks are far lower.
Usually, if you are consulting a financial planner, you will find that asset class diversification not only protects the overall portfolio, but also your returns against market volatility, even when making provisions for a specific financial goal. Understand the nature of various asset classes by noting their past performance and return on investments, and choose the asset class which best complements your needs.
While online calculators can give you an idea of the asset mix that is suited for you, it is advisable to contact a professional to help you build a portfolio specific to your requirements.
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PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 266 7446
Email: care@pgimindia.co.in
This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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