Asset allocation is important when investing because it makes sure that you don’t put all your eggs in the same basket. Different asset classes and investment products have different risk-return profiles and investing in them in a strategic manner can help you make the most of them.
Here Are Three Asset Allocation Strategies You Can Consider When Making Investments In 2023:
- Strategic asset allocation
This is one of the most common asset allocation strategies. Here, you start by deciding target allocations for each asset class that you want to invest in. For instance, 40% equity, 40% debt, and 20% gold. Then, you ensure that you undertake portfolio rebalancing regularly to maintain the target allocation. The target allocations should be decided based on three primary factors – your financial goals, investment horizon, and risk appetite.
To help figure this out, you can make use of an asset allocation calculator. An asset allocation calculator is a free, online tool offered by some of the best mutual fund houses in the country. This calculator takes into consideration all the important factors to help you decide what your target asset allocation should be. Over time, as your goals and financial situation change, you may need to reset the targets so that your investments align with your life stage.
- Dynamic asset allocation
The dynamic asset allocation strategy is a more active one rather than just buying and holding. Here, you constantly track the performance of the market and undertake portfolio rebalancing accordingly.
So, if an investment in your portfolio declines, you sell it immediately to avoid losses in case of a further decline and if the market conditions seem favorable, you invest more in that security. This asset allocation strategy is suited for investors who have a good understanding of the way the markets function and the time to be actively involved in their investment decisions.
- International diversification
An asset allocation strategy that is popular in recent times is adding international exposure to your portfolio. This means investing in securities issued in countries other than India. So, if you invest in stocks of a company listed on the US stock market, you will be making international investments and diversifying geographically.
This is beneficial because the Indian stock market is not perfectly correlated with the stock market of other countries like the US. So, if for some reason, the Indian market isn’t performing well, investments in the US could make up for the losses and balance out your portfolio’s returns. According to experts, investors should limit international asset allocation to 15%, based on their risk appetite. You can invest in international markets through mutual funds offered by mutual fund houses in India.
Wrapping up
Before you decide on which asset allocation strategy is best for you, it’s crucial to understand what kind of goals you are trying to meet through investing and how long you have to meet them. This forms the basis of all your investment decisions. And using an asset allocation calculator makes this task easy as you simply have to put in some basic details like your age and investment horizon, and the calculator shows you what the ideal asset allocation for you can be.
