Why asset allocation and re-balancing are essential

Asset allocation is important as it determines how much risk you are ready to take with your investments and how much reward you expect in return. As you plan to invest your hard-earned money, you allocate funds in different asset classes as per financial goal, risk appetite, and time horizon.

The main objective of asset allocation is to reduce risks, ensure stable returns and have a balance of funds that can make up for losses, if any, and hence you should be careful while putting funds.

You can choose from a plethora of options such as equities, commodities, mutual funds, traditional tools, etc., and put money accordingly.

By diversifying your portfolio strategically, you can give weightage to those funds you are comfortable investing in. For instance, you can allocate 50% in equities, 30% in mutual funds and may be 20% in traditional tools. You can assess how much return can these funds yield.

If you are a first time investor, you can start with a simple asset allocation mix of stocks, mutual funds and FDs and PPF and as per your risks and knowledge, can increase the amount gradually.

Now that you have got your asset allocation right, it is also important to re-visit to from time-to-time and re-balance it, if needed.

You should assess how the funds are performing and whether they are helping you in achieving the desired financial goal within the stipulated time frame. If not, you can tweak it and put funds in some other asset class.

In case you have achieve your financial goal, you need to rejig the portfolio. You should also re-balance your portfolio, if your financial goals have changed, or you’ve exposed yourself to too much risk.

Asset allocation and re-balancing are important and can help you in achieving the financial goals you’ve set for yourself.