Hello Readers!
An individual when the plan to invest in any kind of Mutual Fund Assets, very first he needs to address three questions, for how much time he can invest, how much risk he can digest, and how much return does he expect from his investment.
In short, if we say, these three questions create a base for any individual to decide where he should invest ad what would be his plan or strategy regarding his Asset Allocation.
Asset Allocation is generally defined as an investment strategy to balance an investor’s risk and returns by designing his/her portfolio according to his/her risk, time horizon, and goals. In simple words, we can say, asset allocation aligns your investment portfolio with your risk profile and thereby your returns expectations.
Through this blog, we are going to give you a step-by-step guide for your asset allocation in mutual funds.
STEP-BY-STEP GUIDE FOR ASSET ALLOCATION
Asset allocation is a process that one needs to follow while investing in mutual funds. When any individual plans his strategy for asset allocation he needs to look at his risk appetite, time horizon, and return requirement individually because each of them is equally important.
Risk/return profile
The very step is establishing your risk and return compatibility. If you are an investor who wants to get high returns and is capable of taking high risk, then you can allocate your assets more in Equity Mutual fund. In case you don’t want to play a risky game and are satisfied with guaranteed and moderate returns then you can look at debt mutual funds.
Goals/time horizon
Understanding the goal or objective of your investment is necessary because your investment goal will decide your investment tenure. Like suppose you need some money for tax saving it is most probably a near term goal because you need to file income tax return forms every year; if you need money for your retirement then it is a long term goal, buying a car can be a short term goal, higher education or marriage may be a mid-long term goal depending on your age and so on. Thus, classify your investment goals and based on that fix your investment tenure.
Match your risk with your goals
Now that you have classified your goal it’s time to match it with your risk. If you have a low-risk appetite, then you may not want to invest in equities for your short-term goals. If you have a high-risk appetite you may want to invest in equities for your long-term goals like retirement. In case if you want to invest in your long-term goal but do not want to take a high amount of risk in Equity Mutual fund, then in such a scenario you may look towards investing in Hybrid Mutual Funds. Matching your risk or say aligning, your risk with your goal helps you invest in a financial product with realistic expectations.
Diversify your portfolio
Diversification in your portfolio between high- and low-risk assets properly, is necessary, even if you are able to take high risk. It is an ideal strategy of investing, to spread your risk and invest across assets that are not related to each other. Investors who have a diversified portfolio, benefit in case if one asset underperforms, it has no bearing on the other asset. This will help investors to neutralize their losses due to an underperforming asset.
Rebalancing and reviewing
Asset allocation doesn’t end once you start investing in a mutual fund rather it goes along with your investment. You need to keep reviewing your portfolio every now and then, or with every change in your life goals. Say you had invested more of your retirement corpus in equities when you began your investment journey. As and when you are nearing retirement, you may want to keep moving your money to debt or more-guaranteed instruments. This is just one example. Rebalancing and reviewing your portfolio is an important step to asset allocation.
Investing in mutual funds is risky, but it becomes easy and profitable if you follow a proper investment strategy and asset allocation is one important investment strategy. Knowing how much money you need, when do you need it and how much of it can you afford to risk is extremely essential before making any investment decision.
For any kind of investment query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).