Asset allocation and diversification can seem like an intimidating activity to manage by yourself while monitoring your daily expenditures, saving, and investments, but it forms an essential foundation to your financial freedom.
While trying to navigate through this storm it is important to understand why Asset Allocation is important. Imagine the concept of investing as a huge ocean and making a decision of whether you would like to stay safe on the shore or set out in the deep waters is like calling the shots to have the best returns from your invested sum.
Whether you choose to stay or sail, the destination either ways remains the same – to make your money work harder for you and most importantly make it work the hardest you can afford it to! This journey is your asset allocation.
Surveying the best allocation in a variety of asset classes depending on your goals and how much money you can invest.
Before taking any journey, you try to mitigate the risks and plan ahead. An asset allocation plan is the right tool that takes into account your personal circumstances, goals, time-horizon, and need and willingness to take risk as the mapping factors and variables to create the right plan that fits your needs best. There are a few simple steps to remember while making your asset allocation plan:
1. Balance long and Short-term goals:
The time frame you provide for each financial goal will help you allocate the right sources in the right time. In order to do that effectively, the question you should ask yourself is what is the purpose for this investment? Is it for your retirement or for an unforeseen crisis situation? Each of your goals probably has a completely different time scale. Knowing the time scale details in advance will help you set more attainable and realistic goals.
2. Choose the right asset classes:
Choosing the right asset class will help your money grow at the right speed. There exist three main asset classes - equities, fixed-income, and cash and equivalents. Each having different levels of risk and return and hence behaving differently over time. Different assets are useful for different objectives.
3. Beating inflation -
Irrespective of what goals define your financial journey, with everyday risks like inflation involved, it is necessary to understand the right fit in determining the allocation of your assets. Finding the sweet spot between time, returns, and risk mitigation involves knowing your personal threshold for the loss pain ratio.
You would never bet all your money on the same side of the dice unless you were absolutely certain of the outcome. In the real world, there is seldom such surety hence it is often advisable to have your assets spread out and avoid over-concentration.
An asset allocation plan is only as good as its returns. Now that you’ve left the shore and sailed into the deep waters, you have a better understanding of how to navigate through creating the best-suited asset allocation plan for you.
The next aspect is to begin the hunt for the perfect returns, a journey of asset allocation exploration! Let’s sail through a few assets that are popular and easily accessible to us.
For your goals that are still a few years away, you could consider looking for FDs with average returns of 7% PA, but with the disadvantage of the inability to access it for a fixed period. Bonds and debt funds are useful for people who are older and cannot risk their savings for retirement to a stock market crash. You can diversify with ultra-short-term mutual funds also.
Mutual funds make your deepwater sailing less stressful and casting your anchor easier. For long-term investments, direct equity stocks can be the most useful asset if you’re looking for investing beyond 10 years. Mutual funds is the best option as opposed to direct equity if you don’t have time to monitor and manage your portfolio actively.
Digital Gold is a viable hassle-free, fairly valued, and pure form of investment. Whether it is through Sovereign Gold Bonds, Gold Mutual Funds or Gold Exchange Traded Funds, investing in Gold can reap many lump-sum benefits depending on your goals.
There are multiple such options available for you to explore through your journey and understand which asset suits your goals best.
What needs to be understood above all, is that depending upon what you want to spend on ultimately, the duration of your investment could be long-term, short-term, or even ultra-short-term. Ultimately, all your investment-related doubts can be resolved with the right goal orientation.
This can be made easier by managing your asset allocation options and ideas through a tabular or infographic representation of various protectors or growth assets. Adding on details on when they can be used and by whom will help in times of immediate decision making.
Decision-making in distressful times as the ones brought by the pandemic, bring about the importance for you and your family to understand the role of ‘nomination.’ A nominee is a representative that is responsible for the transfer of the deceased’s assets to the rightful heirs. Assigning a nominee to your assets is the most important step to secure the future.
A deep dive exploration into this forum with the right consultation will help amplify how effective asset allocation can be as a tool for your financial management.
(The author is Founder of LXME, and MD & Promoter at Anand Rathi Share and Stock Brokers Ltd)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.