How to do asset allocation in the right way?

Doing asset allocation starts with understanding yourself, and your goals. The implementation strategies are dependent on that.

How to do asset allocation in the right way?
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The term asset allocation means to strategically divide your investments among different asset categories, such as stocks, bonds, real estate, cash, and cash alternatives. Asset allocation is always a heated topic for discussion. And that is not for the right reason. Most of the time some things that confuse investors are how to pragmatically approach, implement and maintain one’s asset allocation. The best way to find a solution to this is by considering facts such as income, expense, assets liabilities, protection plans (insurance) and financial goals.

So here we have presented some tips and ways to be righteous while allotting your assets.

The first step in asset allocation is – To know yourself.

It is the first and the most important step to know yourself before deciding the right asset allocation. How do you perceive risk? How do you react to its occurrence? What relative scale do you follow to risk as a nightmare? The answers to these questions will help you to understand yourself before allocating your assets. This exercise of questioning yourself and finding the answer to it is called risk profiling.

Most of the leading investment platforms today offer various types of risk profiling tools. Examples include: Kuvera, Goalwise, ETMoney, Groww, Zerodha Coin,  Paytm Money, Piggy, CAMS Or Karvy [Registered Transfer Agents]. Also check out respective AMC Portals like Axis or Aditya Birla Sun Life. Mostly, the risk profiling done through a series of multiple-choice questions. These questions are carefully designed by leading financial experts. This strategy is used to mark the starting point of your allocation mix. Here is an example by fundsupermarket.co.in that will help you to understand the types of questions. Fundsupermarket.com is one of the largest online distributors of mutual funds in Asia. They have features such as tools to measure your risk profile and to plan your investment better, specialized research to help you understand the market.

Spend time to understand every question. Go through the possible answers. Always remember this is not an exam where you either fail or pass. Do not stress for any ‘right opinion’ or do not get influenced by anyone’s opinion. Every individual is different and every answer will determine your response and help you to understand your allocation mix. These question answers exercises will help you to understand whether you are a conservative, moderate or aggressive risk-taker.

The next step in asset allocation is – To know your Goal.

Having a goal behind every investment is very important. A goal may or may not be a life goal. For example, to buy a new car or house, for any vacation or trip or any educational purpose. To set a goal you need to first figure out your current position in life monetarily and what you are expecting in the future. Then the next step is to work on the detailing of the goal. For example, I want to buy a house, is not specific. I want to buy a 3BHK flat in Mumbai which would cost me 1 to 1.5CR in INR is a specific goal that you can action on. The third step is to analyze the goal and see if it is achievable or the amount of time it would take to achieve the goal.

In cases where the goal is critical or difficult to achieve, you may need to make the changes in the date of achieving the goal. For such critical goals that are difficult to achieve, you can break down the goal and meet in small steps. An example is a systematic investment plan also called SIP. SIP is usually a term used in Mutual Funds Investments and helps you invest in a disciplined manner. SIP allows an investor to invest a fixed amount at preset intervals in the selected mutual fund scheme. For more such information regarding SIP, Click here.

The third step in Asset allocation is – To know your Horizon.

Checking on your time horizon is very important before making any investment. This is one of the important factors to consider for the ideal asset allocation. For example, if you need funds in a short period of time, you cannot invest in relatively risky assets. It is highly recommended that in such times you should either stay invested in or switch your investment to non-volatile risk-free instruments.

Usually, multi-cap schemes such as Motilal Oswal Multicap 35 Fund, SBI Magnum Multicap Fund, Kotak Standard Multicap Fund, Aditya Birla Sun Life Equity Fund, and ICICI Prudential Multicap Fund are cosnidered as moderately risky funds. The time horizon for moderate goals should be at least five to seven years. Aggressive risk takers can invest in Venture Capitals, Foreign Emerging Markets, REITs, Currency Trading. And Conservating risk-takers should invest in Fixed Annuities, Immediate Annuities, Certificates of Deposit (CDs), and Stable Value Funds. So according to the economictimes.com here are the top 10 investment options for you based on the risk profile.

While setting a goal, one very important thing you should remember is that long-term goals would one day become medium-term goals and finally move to be a short term goal. It is quite obvious that investors tend to skip this point while making long term plans. Hence, you cannot stick to the same set of instruments throughout the lifetime of a goal. Also, while taking higher risk than the estimated risk profile, you should ensure that it satisfies the time horizon as well. Generally, for investing long-term you should be aggressive risk-taker, for the medium,you should moderate and short term goals you can be conservative.

The final step in asset allocation is – To implement your asset allocation.

After working on all of the three steps above. This is the time when you have to implement your strategies and allocate your assets wisely. So, for that,we have two ways to move forward that are either maintaining the same ratio of different asset classes throughout and next is to change the asset mix as per the remaining period. In the first option, the strategy works best when there is no critical life goal attached to it. The second option works when you make investments with a financial goal in mind.

A finical advisor is the key when allocating implementation strategies. Also, there are products with inbuilt mechanics of asset allocation like hybrid mutual funds, balanced advantage fund, asset allocation fund, etc. Mutual funds include certain schemes that aim to maintain a pre-decided ratio of exposure into different asset classes.

Here are the key takeaways

  • The more you know about yourself and your investment the better it is when you step up for an investment decision.
  • You should know your Goal. Whether its a short-term goal or long term goal you should be able to figure out all the statistics such as type of goal, the purpose of the goal, time for achieving, size or the amount of goal.
  • The time horizon plays an important role while making any investment. Your time horizon is highly based on your risk profile so you need asses and keep on reassessing your risk profile.

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