Asset allocation is one of the key factor that helps in achieving long term financial goals by creating long term wealth. In order to maximize returns and mitigate the risk factor, asset allocation is very important. With effective asset allocation, different asset classes will outperform in the market cycle at a different time period to generate a better return by limiting the risk involved. Depending on your age, risk-taking ability and living standard, asset allocation differs for different investors. Investing in a diversified portfolio with proper asset allocation will balance the risk profile and ensure long term wealth creation.
Why asset allocation is essential for investment objective?
Usually, investors prefer to invest in a single asset class for better tracking of your investment. But the risk involved in the single asset class is really high as that asset class might not perform well in particular market condition. So, a diversified portfolio will help in generating a good return throughout the market cycle as either of the asset classes will do well in the prevailing market situation.
- Based on your investment profile and risk appetite, optimum asset allocation is a stepping stone to achieve your investment goal.
- If you are a high-risk investor, your investment portfolio must include around 80% in equity investment, 15% in debt mutual and rest 5% in gold.
- There is no such hard and fast rule to evaluate which asset class will yield a good return and when will it go down. So, with efficient asset allocation, your wealth will be spread along with the investment portfolio which will generate risk-adjusted returns.
- In the long term, it is believed that almost 90% of return that is earned is because of optimum asset allocation with proper risk management strategies.
- Before focusing on the investment portfolio, you must figure out your financial objectives and the time you need to achieve it. The investment portfolio of short term goal is slightly different from long term goals.
- Your investment portfolio must include emergency fund which can protect you against any unexpected financial situation. You must save for an emergency fund which is a great risk management tool against any emergency situation.
- Going for a SIP investment plan for asset allocation is a safe approach to protect your investments during the market downturn. Mutual Fund with SIP investment is a very good asset allocation strategy.
How can you accomplish financial goals with asset allocation?
To attain your financial objective, diversified investment portfolio along with proper asset allocation is utmost important. Asset Allocation is the financial mantra to achieve financial goal. Following are some pinpoints to support the above-mentioned statement-
- Set your financial goal- Before going for asset allocation for your investment portfolio, you need to set your goal first. Whether you are planning a vacation with your family or need financial aid for your wedding purpose, make retirement planning or want a back up for your child’s education, you must clearly set your financial goal. Based on your financial objective and its type, risk appetite, and lifestyle, the asset allocation strategy must be designed.
- Invest Early– Nowadays, almost every individual is starting to earn early. If you want to achieve your financial goal at the right time, you can start investing early. At the begging period of your earning, you tend to grow fast and can take high risk. So, if you start investing early, then your investment corpus will be large enough to create long term wealth for your future goals. Moreover, if you invest early, your investment portfolio will mainly include equity investments which do have high risk but will yield a high return in the long run.
- SIP Investment- In order to balance out risk and yield maximum return, SIP investment is very important for asset allocation. With SIP investment plan, you can easily invest without putting much pressure on your wallet. Moreover, the SIP investment plan helps in accumulating more units at a low price when the market is falling. In this way, you can build a huge corpus of investment portfolio to achieve your financial goals. SIP investment plan for asset allocation helps in risk management and generating the maximum return.
- Emergency Fund- Building an emergency fund is a very essential step towards achieving your financial goal. Using an emergency fund, you can easily overcome any turbulent phase without worrying about the money. The investment portfolio of the emergency fund helps in risk management and can must financially cover you at least for 6 months. Creating an emergency fund is a very smart asset allocation strategy to help you achieve the financial goal.
- Equity Investment- Investing more in equity fund helps in building a huge corpus to achieve your financial goal. Equity investment is suitable for those who are ready to take high risk and is planning for long term goal. The asset allocation which includes a large part of equity investment generates a high return in the long run. Though equity investment is very volatile and get very much affected by the market condition, but in the long run, it generates a high return. For long term financial goal attainment, you must go for asset allocation which includes a large portion of equity investment.
- Risk Management- The asset allocation of your investment portfolio takes into account the risk management of the asset classes. Based on your investment type i.e., equity or debt fund, the risk management depends. With optimum asset allocation along with proper risk management, your chances of earning risk-adjusted return during market downturn increases manifold.
- Review the investment portfolio- After the asset allocation, you must track the investment portfolio. The tracking and reviewing of your investment is very essential for a healthy corpus. If the sip investment of your asset allocation is successful in generating more than the benchmark index, then your actual return is more than the expected return. For a better result, you can go for the rebalancing of portfolio.
- Portfolio Rebalance- In order to line up your investment with your financial goal, you can rebalance portfolio for better risk control. Through rebalancing of portfolio, you can easily readjust the weight of an asset class by redesigning a new asset allocation. In simple words, you can reinvest the profit from an outperforming fund to an underperforming fund so, that your investment portfolio is not solely dependent on a single asset class or investment.