The successful investor knows there are more than a couple of asset classes where he/she can invest in. Many of us don’t realise this and blindly invest in just 1-2 asset classes which may or may not include Equity. A proper asset allocation strategy helps to diversify your investible amount into various asset classes such as equity, bonds, commodities (such as gold) and cash (including FDs). This helps in diversifying your risk so your portfolio is not vulnerable to a single type of instrument or market event, and at the same time is delivering the right level of total return in accordance with the total risk taken. A diversified portfolio helps you sleep peacefully at night.
So how can a small investor use Asset Allocation?
For small investors, it is always best to start with taking a simple Risk profiling test. These are available freely online on various apps and websites, who would happily also suggest a good investment mix to you. Use these as a gauge to understand where and how much should you invest but you don’t need to stick to the rules specified. Often it is best to exercise judgment as to which asset class should you increase or decrease your allocation to.
What about High Net Worth Investors?
For HNIs, this exercise would be performed by professionals as usually the information would be more diverse in terms of their income sources and liabilities. However in essence they are doing the same thing at a more personalised level, as the basics of risk profiling and asset allocation are still the same.
It is also important to revisit and rebalance your portfolio from time to time based on the changes in the market conditions and personal situation.
If someone wants to create a portfolio with Rs 1,00,000 right now. What should be the right asset allocation strategy?
There is no such thing as a right or wrong asset allocation. What works for a retired businessman in Mumbai may not work for a Government employee somewhere in Kerala. The important point to note is there should be a proper risk profiling done which includes answering questions related to age, income levels, existing savings, number of dependents, existing liabilities, etc. This would indicate the client’s ability to take risk. At the same time there should be questions regarding his return expectations, what worries him about his portfolio, etc. which helps in determining the client’s willingness to take risk. Based on all of this information a proper asset mix is determined for any client and accordingly suggestions are made.
We love to hear from our readers on what do they think about Asset Allocation, and how can it best used by investors (small or big). Please leave a comment below with your views.