Know the importance of Asset Allocation
Asset allocation is an investment portfolio technique that helps to reduce the risks associated with an investment option through diversification. Asset allocation helps to balance risk by dividing assets among major categories such as cash, bonds, stocks, real estate, commodities and derivatives. Each asset class will behave differently over time as they have different levels of risk and return. There may be a chance that one asset category increases in value; another may decrease or may not increase as much.
Best financial advisor believes that asset allocation is one of the most important decisions that investors should make. But the most common question is which class you should put money into. Let me tell you that there is no simple formula to find the right asset allocation for anyone. If you are likely to need your money within 2 to 3 years, you can invest in debt mutual funds. We suggest you stay away from equities as the equity market can be volatile in the short run. Hence, if you want to invest your money for five years or more, investing a higher proportion in equities would be the right approach.
Therefore asset allocation plays a major role in investment through Mutual Fund. In this article we have outlined five major points that we feel are important when thinking about asset allocation.
1. Risk vs. Return
Risk-return trade-off is at the core of what asset allocation is all about. It is easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest potential stocks and derivatives is not the solution actually.
According to a rule, equity allocation should be 100 minus your age. The younger you are the higher should be your equity proportion. As you grow older, you will be able to add more debt instruments or cut your equity proportion. It is because your risk taking capacity also decreases with time. Investors with a higher risk tolerance should allocate their money into stocks. But if the investor can't remain invested through the short-term fluctuations of a bear market, they should cut your exposure to the equity market. High-risk investment options have the potential to give higher returns.
2. Software and Planner Sheets
Financial planning software and survey sheets designed by financial advisors or investment firms can be beneficial for your investment decision, but never rely solely on software or some predetermined plan. Because these survey sheets sometimes don't take other important information such as whether or not you are a parent, retiree, or spouse. Always remember, financial advisors suggest you a tailor made plan because it's best for you.
3. Know Your Goals
Everyone has their goals. Your financial goals are essential to determine your ideal asset allocation. Whether you aspire to build a fat retirement fund, pay for your child's education, or simply save for a new car, you should consider it in your asset-allocation plan. All these goals need to be considered when determining the asset allocation. For your short term financial goals, debt mutual funds such as liquid funds, short term funds and more are good investment options. Invest in pure equity funds if you want to achieve long term financial goals.
4. Investment Time period
Starting early helps you to achieve financial Freedom. Having time not only allows you to take advantage of compounding but also shows the time value of money. Starting early means you can put more of your portfolio into higher risk/return investments, like investing in stocks.
5. Just Do It!
One should invest in a mix of stocks, bonds, and other investments for better results. Initially find out how your current portfolio breaks down. Always remember to see the percentage of assets in stocks versus bonds, but don't forget to categorize what type of stocks you own—small, mid, or large cap. You should also categorize your bonds according to its maturity like for short-term, mid-term or long-term. Mutual funds can be more problematic. Investors should dig deeper in the prospectus to figure out where fund assets are invested because knowing the fund name doesn't always tell the entire story. Before making the final decision, always consult the best financial advisor.
Conclusion
Therefore from the above article we can say that there is no single solution for allocating your assets. Individual investors require individual financial solutions. If you have not invested yet don’t worry. It is never too late to invest in a mutual fund, but the earlier you invest the more you benefit. It's also never too late to give a new look to your existing portfolio. So start investing today to achieve financial freedom. For best financial advice contact us at: 9792501234
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