Follow asset allocation for higher returns

All of us,at some point in life,have been advised to never put all our eggs in one basket. Have a back-up in case your original idea does not work out

All of us,at some point in life,have been advised to never put all our eggs in one basket. Have a back-up in case your original idea does not work out.

People often get carried away with emotions while investing. When one asset class starts yielding good returns,we want to transfer all our wealth there without thoroughly analysing the possibility of a downside.

This is where asset allocation is vital to ensuring that your portfolio remains balanced. Asset allocation simply means distributing your wealth and resources across various instruments such as mutual funds,equity,debt,fixed deposits,real estate,gold,etc. Each instrument that you invest in,is a part of the entire portfolio. The idea of diversifying your resources into various asset classes is to maximise your returns and minimise the risk involved.

The steps below can guide you on how to choose the right asset allocation for your investments.

Why?

Before you put away a single pie as investment,make up your mind on why you are doing it. What is the purpose of this investment? When the investment matures what will I do with it? Unless you know what the money is going to be used for,you will never be able to decide where to put it.

How long?

Next step would be 8211; how long do you have for the goal to fall due? For eg: If you are investing to fund your child8217;s hefty school fee falling due every April,you have less than a year. And if you are investing for the same child8217;s post graduation,you have over 15 years. Risk and return are both functions of time spent invested in debt investments,risk increases as tenure increases and in equity investments,risk reduces as tenure increases. So,what assets your portfolio will consist of,is clearly a reflection of time horizon.

How much?

How much returns is necessary to reach the goal is the next question to be answered. Say you have Rs 1 lakh stas-hed away to fund your child8217;s education and are willing to invest Rs 5,000 every month for the next 15 years and you require Rs 25 lakh at that time for the goal 8211; your portfolio should generate close to 10 per cent. If your portfolio should generate 10 per cent compounded annually,and you have a choice between two asset classes A that will generate 8 per cent and B that will generate 12 per cent,you should can choose 40 per cent of A and 60 per cent of B.

Choosing non-correlated assets

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Traditionally debt markets have performed well when equities have not. Gold held up when equity markets turned bearish. When interest rates go up,which may be good for investments in FDs,real estate markets take a hit. If the portfolio assets move in opposite directions,even though not perfectly,risk comes down and overall returns hold up.

Rebalance

Getting the asset allocation right at the beginning is probably easier than maintaining the asset allocation for a longer period. As markets move and when you choose assets that move unrelated to each other,rebalancing is the next big challenge. Quoting Nick Murray,8221;With asset allocation you can8217;t make a killing,but neither will you get killed. That8217;s a pact you make with God.8221;

Author is Founder amp; CEO,Freedom Financial Planners