Say you give Rs. 1 lakh to three investors to invest today. The kind of assets they each buy will no doubt be different.
Which of these portfolios is ideal? Well, that depends on the age and the financial goals of the investor. These factors determine what the right asset allocation is for every investor. But what is the meaning of asset allocation? Let’s find out.
Asset allocation is the practice of dividing your investment amount among different assets and asset classes like stocks, bonds, gold, real estate and cash.It is the process of deciding what assets to buy with the money you have to Mutual fund invest .
Asset allocation is important because it ensures that your portfolio is aligned with your financial goals. It also ensures that you do not invest in assets whose risk profile does not match your risk appetite.
So, what is the ideal way to go about breaking up your corpus across different assets. That’s just what we are going to see in the next section.
There is no ideal, one-size-fits-all portfolio asset allocation for investors in general. The definition of ideal will vary from one investor to another. Even for the same investor, the right way to distribute their capital across assets will vary as they age. So, if you are just beginning your investment journey, here is how you can figure out your ideal asset allocation.
In your 20s, you are young and you’re decades away from retirement. This means that you can afford to take on more investment risks and invest in the share market today. So, your asset allocation may lean more heavily towards equity stocks and equity mutual funds.
This is alright, as long as you don’t have too many debts in your name. Also, you need to balance your equity investments with a few stable investment options to diversify your portfolio and reduce the overall risk exposure.
In your 30s, your earning capacity may increase significantly. However, you may also have more debts in your name, like a housing loan or an auto loan. Nevertheless, you can still continue to take on a bit of risk in this age group, because your retirement is still several years down the line.
So, your portfolio could consist of a large part of equities and some fixed income assets to balance out the risk. You could invest in mutual funds online, or create your own stock and debt portfolio.
In your 40s, your retirement age is much closer. You need to ensure that your high-interest debts are paid off. As for your asset allocation, it may be time to gradually reduce your exposure to high risk investments and increase exposure in stable investment options.
You could continue your mutual fund investments in the equity market, provided you choose blue chip stocks of fundamentally strong companies or stocks that pay out dividends regularly. Apart from this, it may be a good time to increase your asset allocation to debt instruments and deposits.
In your 50s, your priority should be capital preservation, as opposed to capital appreciation. With retirement approaching just a few years later, you need to ensure that you have sufficient funds to take care of your post-retirement life goals. It is also essential to set up an alternate source of income, since you will no longer be working after you retire.
By this time, you can reduce your equity exposure almost entirely, and modify your portfolio allocation to include more debt and fixed income investments. Also ensure that you choose investments that can give you a regular income payout, if possible.
By this time, you would have most likely retired. With the right financial planning, you should have been able to pay off all your debts. Your asset allocation should entirely be in safe, risk-free or low risk investments like gold, real estate, deposits and debt instruments. This way, you can ensure that the corpus you have built over the years is well-preserved, and is not vulnerable to market movements.
Apart from the above thumb rules, you can also ensure that your asset allocation is optimal by aligning your portfolio with your financial goals. Here are some pointers to help you with this.
Your asset allocation must be aligned with your goals. You need to know what you are investing for, whether it is for a new house, for your children’s education, or for a retirement fund.
You must also choose investments whose tenure matches the horizon of your goals. In other words, choose long-term investments for long-term goals, and short-term assets for near-term goals.
Know how much you need to attain a particular financial goal, and invest in an asset whose returns will help you build the required corpus. For instance, investing in an FD to create the funds for building your home is simply not feasible. Instead, you need to invest in the equity market or equity funds to earn high returns.
If your ideal asset allocation includes investing in the stock market, you need to first open a demat account to get started. You can easily do this on the online platform offered by Motilal Oswal. Ensure that you revisit your portfolio every six months or every year to keep it aligned with your age and goals.
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