5 golden rules for creating your asset allocation plan – Forbes Advisor INDIA



As an investor, you can invest your money in various assets such as stocks, debt, gold, real estate, among others. Allocating money to one or more of these assets is called asset allocation. The actual mix of assets you hold in your investment portfolio depends on how many years you want to allocate to achieve your goals and your risk appetite.

The establishment of an asset allocation plan avoids making ad hoc decisions when investing. Here’s everything you need to know about it.

Set your goals before investing

Your asset allocation should not change based on the performance expectations of various assets. Rather, your asset allocation should be based on your investment goal, your risk appetite, and the years left to meet financial goals. However, depending on actual performance, you may need to rebalance your portfolio to stick with the initial asset allocation plan in order to meet your long term goals.

At the start of any calendar or financial year, clarify your financial goals before allocating funds to equity funds, debt, and gold-backed investments.

Remember that the key to generating a high risk-adjusted return in your portfolio is the right asset mix. The final return of your investment portfolio is a function of the allocation between different asset classes such as stocks, debt, gold, real estate, etc.

Don’t juggle your short-term investments

The temptation to transfer money from one asset to another based on short-term performance should be avoided. If you’ve already allocated funds to assets based on your medium and long term goals, you don’t need to give importance to the shorter events. Juggling between assets and investments is costly and can prove futile in the long run.

While stocks as an asset class have shown increasing momentum, it is ideal to allocate funds to them to achieve long-term goals. Within stocks, equity-focused mutual funds are ideal for a retail investor looking to save for long-term goals.

Only those who have goals to achieve after at least 10 years of investing should consider equity mutual funds either through a lump sum or through the systematic investment plan (SIP) investment mode. ).

For goals at least three years, the debt mutual fund representing the debt asset class can help investors save tax.

Time in the market is more important than timing

To invest in stocks, investors who continued their SIP investments even after last year’s stock market crash should benefit compared to those who attempted to enter market lows and redeemed their investments.

New and existing SIPs need to keep investing just because the timing of the market hasn’t worked out well for most retail investors.

More than timing, the “time on the marketIs important because SIP investing makes the most of the volatility of equity-backed investments such as equity mutual funds.

As an equity mutual fund investor, tracking short-term events can be a futile exercise. Several studies in the past have shown that compared to other asset classes, stocks offer high risk-adjusted real returns over the long term. Therefore, to maximize the potential of stocks, it is best to tie investments to your long-term goals, with a risk reduction strategy in place, to overcome volatility as goals approach.

Take into account taxation to assess returns

In 2020, the central banking authority, the Reserve Bank of India (RBI), had cut the repo rate by nearly 115 basis points, signaling a drop in interest rates. Debt funds through various mandates have generated returns of almost 9-12% in 2020.

This low interest rate can be difficult to maintain in the long term and therefore the recognition of the profits of debt funds and the deployment of the gains in other assets can be considered, but only after taking into account the taxation. , especially if the short- and medium-term goals come closer.

Diversifying Assets Can Help Achieve Better Returns

Historically, it has been established that the performance of major asset classes is not in tandem over the long term. The performance of the different asset classes depends on factors specific to them. Economic and other factors that have a positive impact on one asset class often cause another asset to fall.

Therefore, if your money is distributed among assets, the likelihood that your portfolio will maintain its value is high. Diversification between assets will help manage the risk inherent in specific asset classes. If the returns of an asset class fall, balance can be maintained by the best performing asset in your portfolio. Put simply, in the process of asset allocation, you do not rely or rely on a single asset to effect a risk / reward allocation across asset classes instead.

Final result

The future is uncertain and it may hold some surprises when it comes to finances. To keep fear, uncertainty and doubt at bay, a strong financial plan in place with a 360 degree approach to protection and investments is important. With savings distributed in the right proportions across asset classes, you can easily achieve your long-term goals.



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