Feb 2023
4 mins read

10 Things to Consider During Asset Allocation

Effective asset allocation aims to balance reward and risk by allocating investment funds into a variety of assets, according to an investor’s goals, time horizon and risk tolerance. Allocating assets to equities, fixed income, cash etc. each comes with its own level of risk, and unique characteristics that could change over time. Here are some factors to consider as you weigh your asset allocation decisions:

Your age

If you are between 20 and 30 years, you can allocate a significant portion of your portfolio to relatively risky assets, such as equities and equity mutual funds, which has the potential to generate higher returns in the long term. As you grow older, it is wise to have a more balanced allocation of both debt and equity mutual funds.

point 1

Your income

Your income decides the amount you can invest. Therefore, any rise in your earnings will probably lead to a corresponding rise in the amount you invest, and vice versa. Whether you are salaried or have a business, proper asset allocation is a must. Try to invest consistently, taking help of tools like a mutual fund SIP.

point 2

Your expenses

To maintain financial stability, it is essential that you spend within your means and cut down on unnecessary expenses. Impulsive spending can disrupt your asset allocation.

point 3

Your goals

The amount you allocate to a particular asset is determined by how close you are to your financial goals. If the goal seems too distant, allocating to riskier assets such as equity mutual funds can generate higher returns and help you reach the financial goal quicker. 

point 4

Your risk appetite

Your asset allocation also depends heavily on how much risk you can handle. While your risk appetite may be larger for some assets, you may want to take a more conservative approach to others.

point 5

Your liabilities

Having high liabilities can force you to be more conservative even if you have a high risk appetite.

point 6

Your assets

Smart allocation is the key to a well-diversified portfolio. For instance, if your portfolio has more exposure to real estate, then you may want to consider equity asset allocation for higher growth, or perhaps debt mutual funds, depending on your risk appetite.

point 7

Time horizon

Your time horizons affects your risk tolerance and can change your asset allocation. For longer time horizons, investing via facilities like SIP can be fruitful.

point 8

Life-cycle funds asset allocation

Your risk appetite will change over time. For example, an increase in salary may increase your risk appetite, while impending retirement could decrease it. You can revise your asset allocation to suit your evolving risk appetite and maximise your returns at each stage of your life.

point 9

Dynamic asset allocation funds

These funds can help investors adjust their allocation based on the highs and lows of the market. It’s important to maintain a dynamic asset allocation strategy in order to minimise downside risks and give your investments room to grow in favourable market scenarios.

point 10

Whatever the chosen approach, effective asset allocation is the key to success as an investor. Consider each of these ten factors and consult a financial advisor to help you make the right choice.

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