Right Asset Mix Will Help You In Wealth Creation

Asset mix is the allocation of an individual’s investment portfolio between different asset classes . Selecting the right asset mix is vital to the achievement of one’s financial goals , both short-term and long term. Let us understand with the help of an example.Different asset classes are impacted by different economic conditions. During the global recessionary crisis of 2007-09, equity markets of many countries performed poorly, but gold prices went up. Thus, an investor who had the foresight to invest in both gold and equity, earned better returns than an investor who only focussed on equities.Primarily, the objective to build a well-structured portfolio is risk diversification. Capital markets tend to be volatile and so do economic conditions. With a prudent asset allocation, the investor does not end up in the unfortunate situation of having all the investments in an asset class that performs poorly. Thus, the purpose of asset allocation is not to enhance returns, but to reduce the risk.The risk in a portfolio can be reduced by bringing together asset classes whose performances are not affected by the same factors in the same way. Thus, investing in the same or similar asset classes is a rookie mistake when it comes to achieving the right asset allocation.

Each asset class has its own pros and cons and its own risk-return matrix. Investors must decide their asset mis based on various factors such as expected returns, risk tolerance, investment horizon, liquidity needs, etc.Majorly, the asset mix should be determined based on two aspects:

• Risk appetite of the investor - depends on factors such as the investor’s age, household size and responsibilities, dependent members, occupation, capital base, etc.
• Risk level of the investment options being considered

Aggressive portfolio: Characterized by high allocation towards equity instruments and balance towards debt securities.Moderate portfolio: This is a balanced portfolio with asset allocation divided equally among debt and equity, ideal for risk-neutral investors.Conservative portfolio: Includes a high allocation towards debt and lower focus on equity instruments. In Conclusion As part of a sound financial planning process, it is essential to decide on a strategic asset allocation. The asset allocation will change if there is a change in the risk and return preferences of the investor.

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.