The performance of your investment portfolio over the long term depends on how efficiently you have allocated funds across different assets. Rather than sticking to one asset class, it’s always better to spread your money across different assets such as equities, debt, real estate, gold or even other alternative assets. As different assets react differently to the external factors, the likelihood of the value of all asset price going up or down at the same time is remote. If an event has a negative impact on the value of a specific asset, the less-impacted assets balance the portfolio returns.
As far as asset allocation is concerned, it depends on individuals’ risk appetite and the number of years to goals. Typically, equities suit when the goals are far away. Nearing goals, debt assets such as debt funds fit the bill. The most important rule is to maintain the asset allocation and not change it mid-way before reaching the goal.
If you are investing without an asset allocation plan in place, you may not be following the financial planning process in its true form. Beginning of 2021 can be a good starting point to build an asset allocation plan.
When it comes to the allocation of funds in 2021, your money should not chase recent returns from the asset classes. “The asset allocation should be based on investment for overall financial goals of a person. Hence, it is better to retain the asset allocation and do not try new things. For long term goals, equities continue to be the best asset class. If anyone wants to invest a lump sum of Rs. 100 for the long term in equities at present, gradual approach of spreading this investment across 6-9 months will be better in the year 2021,” suggests Harshad Chetanwala, Co-Founder, MyWealthGrowth.com
Through asset allocation, you are able to do the first level of diversification while diversifying within assets provides the second level of diversification. For example within equities, you may invest in stocks or equity mutual funds. “Investors should consider in making a balanced portfolio and should be diversified in various segments to take benefit for utmost growth. The portfolio should have moderate liquidity in order to generate cash whenever required. Therefore, it is suggested to have a higher portion of the portfolio in equities around 65 per cent through mutual funds or direct investment. Real Estate can be allocated 15 per cent, Remaining 20 per cent in Liquid Funds and Gold In order to balance the portfolio,” says Nitin Shahi, Executive Director of Findoc Financial Services Group
An important level of diversification is also when you diversify globally. Among several other factors, the performance of equities depends on the economy of a nation. On the back of a strong economy like the US, you may consider investing in US stocks. “While it is important to understand more about the investor and investment profile, let us presume long term to be a tenure over seven years and the risk profile of the investor being close to aggressive. In such a situation, an equity-oriented portfolio with around 75 per cent allocation to equities, 15 per cent to gold and 10 per cent to fixed income should be close to ideal. Within equities, a 15 per cent-20 per cent allocation can be attributed to global equities,” says Subramanya SV, co-founder & CEO at Fisdom