Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.
Asset allocation involves dividing your investments among different assets, such as stocks, bonds, gold or precious metal and cash.
The allocation that works best for you changes at different times in your life, depending on your investment time horizon and your ability to tolerate risk.
Asset allocation divides your hard-earned investment into various asset classes and gives you the potential to earn higher returns while lowering the risk by diversification. All asset classes don’t move at the same pace or in the same direction and that’s why having the right mix is important.
A diversified portfolio will be exposed to lower investment risk because each asset category will respond differently as the market fluctuates. Such a portfolio includes risky and non-risky assets. This minimises the risk of loss from investing in only single asset class.
Diversification of the portfolio provides an opportunity to earn returns from the other assets when one category is not performing well. Not all the asset categories perform well at the same time. This is what makes it important to choose multiple categories of mutual funds — example, large cap, value style and so forth —, to allocate funds efficiently even within the same class.
The markets’ cycles keep changing. So, it is stressful and difficult to keep a track of individual performances of various categories to time an investor’s its entry and exit. Investing in mutual funds with proper asset allocation induces a disciplined approach to investing and, hence, eliminates the risky approach of timing the market.
The markets’ cycles keep changing. So, it is stressful and difficult to keep a track of individual performances of various categories to time an investor’s its entry and exit. Investing in mutual funds with proper asset allocation induces a disciplined approach to investing and, hence, eliminates the risky approach of timing the market.
Optimal asset allocation ensures that investors can address their liquidity needs as and when required. Some investments have a lock-in period and that prevents access to funds during emergencies. But with asset allocation, investors can one can easily liquidate other funds.
