What is Asset Allocation in Mutual Fund All About?
Have you ever been recommended not to put all the eggs in one basket? Do you know why experts suggest this to the investors? The simple reason is the risk factor to which your hard-earned money gets exposed. If you put your money in a single investment avenue, there is a high risk of losing the same in one go.
Hence, asset allocation is the best way to conquer the uncertainty in the market by diversifying the funds across different sectors and instruments. It adequately puts all the eggs in different baskets to avoid breakage. This helps in mitigating the risk appetite and enhancing the chances of earning more returns. Let’s understand the entire concept of asset allocation and evaluate the best way to utilise the money for growing wealth.
Asset Allotment - Meaning
Asset allocation is an investment strategy which is adopted by the fund manager that aims to balance risk and reward by apportioning the assets in the portfolio in accordance with the individual's goals, risk tolerance, and investment horizon. It is the best approach which attempts to maintain a balance between risk and reward by adjusting the percentage of the amount invested in an asset of a portfolio as per the requirements of the investors. It also involves the process according to which you wish to divide your investment across various asset classes which include equity, debt, and hybrid. The primary objective of asset allocation is to minimise volatility and maximise returns which are attained by dividing the money across different categories which do not respond to the market in the same way at the same time.
Significance of Asset Allocation in Mutual Funds
Asset allocation is just like oxygen without which survival of a fund is simply impossible. It has been observed that 91% of the performance of the fund is dependent on its portfolio concentration. A person generally lives 40-50 years after he/she starts earning money. Over such a period of time, it is believed that one's ability to rebalance the portfolio with the right assets is a key determinant of the return on investment. The perfect allocation is the best way to determine the right outcome.
How to Achieve Optimum Allocation for the Portfolio?
Would you taste the meal having a single ingredient only? Never, right? Then how can you hold a portfolio with a single investment? Investing the money without diversification is not effective in any way. As per your personal goals, you may require a fixed sum of money in the short and long term. If you invest in debts only, you will get moderate returns on a regular basis with a little risk. However, if you solely invest in the equities, your portfolio shall be high-yielding in the long run but with immense risk involved. Hence, in both the cases, you would be less beneficial. Instead, if you opt for a mix of both by allocating adequate finances in both the categories as per your goals and risk appetite, you can surely earn tremendous wealth on the capital.
Asset allocation is dependent on your age, risk-bearing capacity, investment goals, and tenure. The investors of the young age between 21 to 30 years are often recommended to go with high equity exposure while balancing risk with a cup of debt funds. Those having the age between 31 to 45 years are suggested to keep a balance between security and rewards by opting for a proper mix of equity and debts. However, those above the age of 45 and are approaching their retirement are encouraged to go primarily for the debt investments.
There isn't any set rule or format to get the perfect solution for allocating assets. It is done on the basis of individual needs and most importantly their financial status and risk appetite. So it isn’t difficult to make an adequate asset allocation, but you just need to make some efforts to know exactly what you want.
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