Strengthening your Investment Portfolio through Asset Allocation

Wealth creation is a lifelong endeavour and requires proper investment planning over the long term. It calls for calculated investment decisions, especially in allocating to asset classes to create a potent and well-balanced portfolio. But what exactly is asset allocation and how does it affect your financial investments? Let’s find out.
Jul 2022
3 mins read

What is asset allocation?

Asset allocation is an investment strategy that seeks to balance risk and reward, by dividing an investment portfolio into various asset classes, such as equities, debt, commodities, cash and real estate. Sound asset allocation minimises the impact of a correction in a particular asset class on your portfolio, and seeks to optimise returns on your investments.

How to build a robust portfolio with sound asset allocation

Step 1: Know the different asset classes
Investors can choose from a mix of different asset classes. Each asset class carries a different risk-return potential, and choosing the right mix is essential for a well-balanced portfolio that is in tune with your financial objectives.

Asset ClassReturn PotentialRisk Level
EquityModerately High to HighModerate to High
DebtLow to ModerateModerately Low to Moderate
Cash & Cash EquivalentsLowVery Low
Real EstateModerate to HighModerate to High
CommoditiesModerate to HighModerately High to High
CurrencyLow to ModerateVery High
AlternativesHighVery High
Step 2: Know the factors critical for asset allocation

No two investment portfolios or even asset allocation strategies are the same. The two main investment planning factors to keep in mind are:

  1. Time Horizon: A longer time frame minimises the impact of short-term volatility. If you are only looking at a horizon of a few years, a conservative portfolio with less risky assets would be ideal. 
  2. Risk Tolerance: A high risk tolerance level could mean a portfolio that is heavier on high-return asset classes. But if you are conservative, you might prefer asset classes that are low-risk, lower-return.

Step 3: Identify your goals

Investment goal planning helps you identify the time horizon and risk tolerance level you are comfortable with. For instance, investment for retirement requires you to build a robust portfolio that can ride through market volatilities. When you are younger, your time horizon is longer and risk tolerance level is higher. However, as you near your retirement age, you need to rebalance your portfolio more towards lower-risk asset classes. 

Step 4: Select your asset allocation strategy

You can choose from two broad asset allocation and investment planning strategies:

  1. Strategic Asset Allocation
    With strategic asset allocation, you create a base policy mix or a fixed asset combination, depending on the expected returns in a year. For instance, let us assume that historically, equity has delivered 18% returns, bonds have delivered 8% and real estate has delivered 10% returns a year. In this scenario, a portfolio with 60% equities, 20% bonds, and 20% real estate could deliver up to 14.4% returns per annum.

  2. Tactical Asset Allocation
    Tactical asset allocation refers to a strategy that shifts assets in a portfolio to take advantage of market trends or economic conditions. In other words, tactical asset allocation refers to actions in which asset classes such as stocks, bonds, cash, etc. are adjusted in the portfolio to account for macroeconomic and other events which may have an impact in the short term. Tactical Asset Allocation takes advantage of short term opportunities while staying on course in terms of long term objectives of the investment portfolio.

Ultimately, your asset allocation must protect you and create a portfolio that performs in every market condition. This can be a complex and consequential task, so consult a professional investment planning advisor in building your portfolio. 

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.
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.
The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date as referenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nor does the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be no assurance that any forecast made herein will be actually realized. These materials do not take into account individual investor's objectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies described herein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein. The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.