Asset allocation is an investment strategy in mutual funds, where you choose the assets allocated in portfolio to match an individuals investment objective.
The asset allocation is based on multiple factors like risk tolerance, investment tenure, type of returns and capital gain expected by the investor.
There are three types of assets, equity, fixed-income and cash equivalent.
Equity: In this type the assets are mainly allocated in equity stocks that are highly risky and have the possibility to returns higher benefits.
Fixed-income: Here the funds are allocated in such a way that the returns or dividends are given out in a fixed income format.
Cash equivalent: These are investment securities that are short-term that have high credit and high liquidity.
In the case of asset allocation, it is an investors decision to choose assets that suit their investment mindset. And the way that the assets that are allocated in stocks, bonds and debts will be a major deciding factor in the terms of investment returns.
Here are some factors that you need to consider while planning your assets allocation.
Risks and returns
It is a well know fact that the risks are directly proportional to returns, I.e., higher the risks then higher the returns.
Not many people are comfortable with high risks even if they return better benefits, it is important to plan based on your risk appetite. If you are comfortable with high risks, remember not all high risk investment give higher returns.
The higher the investment period the better the benefits, along with minimizing the returns, the long term investment will give you the benefit of compound returns.
Plan your long term and short term goals
Long term goals can be anything, it can be you planning build your dream home, funding your children s education or your retirement planning, plan your the reason behind your investment before you invest.
While short term goals can range from your dream vacation or event planning, this type of planning will require you to invest for anytime between 3 to 5 years.