How does Asset Allocation work?

A financial portfolio can be built up with different types of investments. You can invest in direct stocks, fixed income securities, real estate, and more. These different instruments can together offer steady and comprehensive financial growth and ultimately take you to your goals. The several classes of assets in your investment portfolio are referred to as asset allocation.

Read on to find out more about asset allocation and how it works.

What is asset allocation?             

Asset allocation refers to allocating your money across different types of investment classes, such as equity, fixed-income or debt, cash and cash equivalents, gold, real estate, and others. Investing in a combination of assets lowers risk since different classes perform differently at a given time. Asset allocation can be decided on the basis of the following factors:

  • Goals: Your goals determine the assets you can invest in. For instance, you can invest in equitymutual funds online if you are saving for retirement. However, if you are investing to build an emergency fund, you may consider liquid mutual funds.
  • Time horizon: Time horizon helps you decide the suitable investments for your needs. For instance, a SIP (Systematic Investment Plan) in an equity fund can be advisable for long-term goals. However, short-term goals can be fulfilled with debt mutual funds online.
  • Risk: Your risk appetite enables you to choose appropriate asset classes. If you are open to high risk, it may suit you to invest in equity. However, fixed-income securities may be ideal for someone with a low-risk appetite.
  • Taxes: Different asset classes are taxed differently. For example, capital gains paid on debt and equity mutual funds online are different for short-term and long-term gains.

How does asset allocation work?

Asset allocation works by helping you understand your needs and picking suitable asset classes to cover them. Typically, there are three types of portfolios. The asset allocation can differ for all three. Here’s how this works:

  • Aggressive portfolio:An aggressive portfolio is ideal for long-term goals and investors with a high-risk appetite. It can constitute 65% stocks, 25% fixed-income securities, and 10% cash or cash equivalents. With more time at hand, the risk appetite increases. Hence, this asset allocation can be used when the time horizon is long, and the goal is not an immediate one.
  • Moderate portfolio:A moderate portfolio can be suitable for mid-term goals and investors with a moderate risk appetite. Such a portfolio can have up to 50% stocks, 30% fixed-income securities, and 20% cash or cash equivalents. Moderate portfolios can be ideal for mid-term financial requirements that do not require an aggressive strategy and can still deliver inflation-beating returns.
  • Conservative portfolio:Lastly, a conservative portfolio is ideal for short-term goals or investors with a low-risk appetite. This type of asset allocation can have 25% stocks, 50% fixed-income securities, and 25% cash or cash equivalents.

To sum it up

The right mix of investments like mutual funds online, bonds, cash, gold, real estate, etc., can help reduce risk and maximize returns. Hence, it is essential to pay attention to asset allocation. Once you have picked a suitable asset allocation strategy, you can use the Tata Capital Moneyfy App to select and invest in different investment options.

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