Asset Allocation - Different Asset Classes & Steps for Beginners

Where should you invest? How much should you invest? What are the potential investment opportunities that you are probably ignoring? You might often find yourself grappling with such questions.The good news is that investing need not be that hard. All you need is to know the concept of asset allocation and build your investment portfolio around this investment principle.

is an investment strategy of diversifying your portfolio to balance risks and the subsequent rewards. Portfolio diversification through different asset classes such as equity, fixed income, real estate, etc., will limit your exposure to each asset class.Since various asset classes can react differently to market dynamics or macroeconomic factors, a diversified portfolio of different asset classes can be better prepared to lessen any negative financial impact.

• Equities Equities and equity-related instruments like mutual funds can often provide a great return on investments if you stay invested for the long term.In a developing economy like India, where there are numerous growth opportunities, long-term equity investments can outshine the traditional investments provided that you are ready to take calculated risks.
• Fixed Income Instruments As the name suggests, these asset classes provide fixed returns on investments. Although they are relatively safe investment options, they are likely to give lesser returns in the long run compared to the equities.
• Gold One of the oldest investment avenues, gold remains a favourite among Indians. Besides, possessing gold carry an emotional value in India, which adds to its stability as an investment option.
• Cash and Cash Equivalents Cash equivalents include money market instruments, treasury bills, commercial papers, etc. These instruments are highly liquid and usually have a maturity between 90 days to one year.Therefore, these instruments are ideal for short-term investment goals.
• Real Estate Purchasing properties like plots, apartments, garages, etc., are classified as real estate assets. While real estate can provide excellent capital appreciation in the long term, it can be relatively illiquid. You can’t sell a flat as quickly as equities or gold.Moreover, you would require a large corpus to invest in real estate. However, you can consider investing small amounts in real estate funds.

While people often use these terms interchangeably, they are not the same. In simplest terms, portfolio diversification is the next step of asset allocation .First, you need to decide the amount of exposure in the chosen asset classes while allocating separate funds for them. Once you allocate funds for different asset classes, you can diversify your portfolio within each asset class.For example, consider that you have Rs 10 lakhs for investment. You perform asset allocation first, where you allocate Rs 5 lakhs for equities, Rs 4 lakhs for fixed income instruments, and Rs 1 lakh for gold.Once you complete the allocation process, you can think of diversifying your portfolio in each of the selected asset classes. For instance, you can consider diversifying your

• Equity portfolio with different stocks and mutual funds,
• Fixed income instruments with bank FDs, debt funds, sovereign bonds, etc.,
• Gold portfolio with physical gold, RBI gold bonds, gold ETFs, etc.

1. Know your Risk Appetite Risk appetite refers to your ability to take risks and the quantity of loss that you are prepared to incur. People can have different risk tolerance levels depending on their mindset, age, economic background, family responsibilities, etc.So, begin with assessing your own risk appetite. Every asset class have a certain level of risk associated with them. Find out how much risk are you willing to take and see which asset class best suits your temperament.
2. Analyse Your Investment Goals Every investor has different investment goals. You can comfortably park your funds in money market instruments if you have short term goals and won’t mind the fewer percentage of returns.On the contrary, planning for big long-term goals like funding your retirement, creating wealth, etc., would require you to invest heavily in equity products.
3. Mix Your Asset Classes Divide your investments across at least two or more different asset classes. Relying on different asset classes can help you maintain steady returns in a volatile market.For example, if your equity investments fluctuate in a volatile market, you may find stability in your investments in fixed-return investments.
4. Time Horizon It is the amount of time an investor is ready to give to the investments. You may be investing your money for two to five years, or you may be planning to stay invested for two to three decades. The longer the time horizon you have, the longer would be your ability to withstand market volatilities, economic downturns and so on.Besides, your investments will get the advantage of compounding. However, you would need a more balanced approach if you are saving for near-future goals such as buying a house, saving for your children’s education, etc.
5. Revisit Your Portfolio Regularly Financial goals and risk appetite can vary over time. For instance, you might have a better salary and more disposable income now than what it was a few years back when you began your investment journey.Therefore, it is vital to periodically review your portfolio to determine whether you need to shuffle some assets or increase the weightage of your investments. Moreover, you might consider reducing your risk exposure as you grow old.

In a nutshell, the asset allocation technique can help you make the right investment decisions. It acts like a sailors compass that can help you stay on the right course throughout your long investment journey so that you reach your destination of financial independence as early as possible.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.