Importance of Asset Allocation..!

by Mr. Anil Chopra, Group CEO, Bajaj Capital

Primarily, there are 6 types of key asset classes.

Namely,

1. Debt instruments

2. Equity instruments

3. Gold

4. Real Estate

5. Commodities

6. Art.

Investors worldwide have to construct a portfolio by using one or more of these 6 asset classes.

Investment Portfolio..!

Typically, the main objectives of constructing an investment portfolio are either wealth creation and / or capital protection  or /  creating a stream of regular income. Proper & prudent asset allocation is a key pre-requisite for getting the best out of your portfolio.

The thumb rules for effective asset allocation are:

About 10% should be invested in gold, 80 -minus - yourage should be the percentage allocation to equity, and the remaining should be invested in a variety of debt instruments like bank FDs (fixed deposits), FMPs (fixed maturity plans), bonds and PF (provident fund).

Real estate, commodities & art should be over - and - above these 3 main asset classes, that is, Debt instruments, equity and gold.

The sole &  most significant determinant of success of your portfolio would depend upon accurate asset allocation which suits your life stage and risk taking capacity, and also your ability and discipline to stick to the same and change it over a period of time depending upon your entering different life stages. Within each asset class, diversification among various options is again a crucial factor having a bearing on the outcome of the portfolio.

For example, within equity, you must diversify your investments between direct equity and mutual fund schemes, and further between large - cap schemes, mid - cap schemes, value stocks, growth stocks as well as thematic funds like contra fund or international equity fund.

Similarly, within gold, you must diversify between physical gold, ornaments, gold ETFs & gold mutual funds.

Timing the market for exit or /entry or /selecting the right script or / scheme are much less significant, and the real emphasis should be on proper asset allocation & diversification for achieving your financial goals.

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