What is Asset Allocation?
Asset allocation is the process (of investment strategy) of deciding how to divide (or take risk) your investment Rupees across several asset categories.
Main Asset Categories are:
– Equities (Stocks),
– Cash and equivalents
Have different levels of risk and return, so each will behave differently over time.
Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.
Break Down The Asset Allocation
As per age and risk the asset allocation formula gets change.
Asset allocation is one of the most important decisions that investors make.
Investors may use different asset allocations for different objectives (goals).
Goals 0-5years – 100% Fixed income (EPF, VPF, PPF, RD, FD and all Debt Mutual Funds)
Goals 5-10years – 70-90% Fixed income (EPF, VPF, PPF, RD, FD and all Debt Mutual Funds) and 10-30% Equity (initial allocation)
Goals 10years – 40-60% Fixed income (EPF, VPF, PPF, RD, FD and all Debt Mutual Funds) and 60-40% Equity (initial allocation)
For first three years:
Age 24 to 32 <Risk is Okay> – Invest 90% into Equity and 10% into Debt
Age 32 to 40 <Risk is Not Okay> – Invest 75% into Equity and 25% into Debt
Age 40 to 50 <Risk is Not Okay> – Invest 40% into Equity and 60% into Debt
Age 50 to 60 <Risk is Not Okay> – Invest 10% into Equity and 90% into Debt
After age 60 <Risk is Not Okay> – Invest 100% into Debt.
Keep Changing the asset allocation periodically.
Make sure your equity + fixed income investment for each goal should beat the real life inflation (after tax) of 8% to 10%.
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