When the total wealth increases it calls for a change in asset allocation.
If you think investments should be done and forgotten hoping that they will give good and continued returns on their own, you are wrong. Markets witness volatility and there are factors such as political or economic which may impact your investments both positively and negatively. Asset classes are impacted differently due to different developments. Hence, in some instances, your investment decision may go wrong because of these factors. Also, it important to understand your risk-taking capacity while investing in the markets at a given point in time.
For instance, when someone unlocks the value of the business/property and creates substantial wealth or someone loses a job, leading to a stop in inflow of salary or income. Under such conditions, it becomes important to take help from an advisor and follow proper asset-allocation strategy.
Here are five important reasons why you would be required to change your asset allocation while heading and passing through several phases of life.
Change in personal profile
These are life-stage changes which happen periodically. Often, when dependents become self-dependent, their profile changes with their lifestyle. Also, retirement changes the profile of a person. In these cases, you need to focus on your asset allocation strategy.
“When your profile changes e.g. at the time of the retirement of a person, the person or the family needs regular income from the portfolio, then one needs to redesign the portfolio or revisit the asset allocation whereby there is a portfolio which could give regular income with less volatility,” said Himanshu Kohli, co-founder of Client Associates.
Levels of risk tolerance
Many time it happens that the thing you cannot buy today, you can easily buy it after a few months or a year. There is a wide difference between the willingness to buy something and having the actual ability to buy that thing. Actually, this depends on the risk-taking capacity of an individual which changes from time to time and the factors which affect your risk appetite are getting a promotion, salary increment in, change of location or job loss. Hence, it is important to understand that every individual is exposed to market risk while investing their money in stocks or mutual funds, however, it should not be factored as the only criteria before investing money because one should know that asset allocation also depend on one’s risk tolerance capacity.
Sudden windfall gains
When the total wealth increases it calls for a change in asset allocation. Kohli explained it through an example: Let’s say a family needs Rs 10 crore to meet all their financial needs in life but due to a certain windfall, the wealth of the family has increased to Rs 20 crore. In this situation, the need-based wealth i.e. Rs. 10 crores will be parked as per the risk-profile of the investor and the balance which is surplus wealth i.e. Rs 10 crores could be parked in an aggressive profile as the time horizon of surplus wealth could be for the next generation and hence much longer.
Never sell your funds just because they are not performing in the short term. If you feel your investment is not giving you the returns despite the risk, you may want to relook your options. However, bear in mind that risk and returns are also a function of time. The market is a very volatile entity, and corrections happen over time.
“The averaging out strategy works so long as the mutual fund is fundamentally strong. If not, the chances of price recovery are very remote. Therefore averaging out a non-performing stock or mutual fund will make you more losses for yourself. If you have waited long enough for the market to correct and are still unconvinced of the investment, cut your losses and reinvest in other better performing investments,” said Navin Chandani, CBDO, BankBazaar.com.
Nearing financial goalsIn order to secure your long-term gains from equities or equity mutual funds, it becomes crucial to change your allocation between equity and debt so as to minimize the risk and secure your gains till the time you achieve your financial goal successfully. Chandani said that equities offer high returns and high risks. In most cases, equity investments average out in the long run and give you good returns. “However, if you are closer to retirement, or if you are looking at returns in the short term or you are nearing towards your any financial goal, then you may want to consider debt options,” he added.The Great Diwali Discount!
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