Asset Allocation: What It is? Why is It Important?

Allocation of assets should be one of the most important aspects when you are planning to invest. It simply means how you decide to divide your portfolio among different assets to gain maximum returns. You can choose your investment path based on:

• Risk-tolerance
• Investment goals
• Comfortable time horizon
• Preferred asset class

If you aspire to be a long-term investor, correctly allocating your assets is essential. 

What is Asset Allocation?

Allocation of assets means investing or distributing your assets across various asset classes. These asset classes include cash, secure incomes, equity, and other investments. The main motive for allocating your assets is to invest in a way in which you the probability of getting returns is higher and risks are lower. 

Asset Allocation Portfolio

There is no specific way to introduce yourself to better investment opportunities. If you want o to have a better sense of financial security, then this probably is the best way to strive. However, there are two approaches which you can avail.

• Age-based Allocation

Many financial advisors will advise you to use the five-year method. It is using your money on a specific investment for five years or more to get the maximum result. The main agenda is to grow your wealth. This time-based allocation can contribute to your returns optimally.

• Life-cycle Funds

Certain types of mutual funds are called life-cycle funds. This type of portfolio addresses the investor’s age, investment goals and risk appetite. Thus, it has a higher exposure to risk at the beginning, but it gradually reduces as you approach 60 years of age. As such, these are called age-based or target-date funds. 

Whatever method you choose, assessing your financial goals before investing is always smarter.

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Benefits of Asset Allocation

Every investment brings you an opportunity to grow your wealth, so it is better to combine asset classes rather than stick to your comfort zone. Here are some benefits which you can avail with this process. 

• Ideal Path to Growth

To expose your funds to long-term growth, choose a variety of options from government bonds to equity. Based on your age, current earning abilities and future goals, you can add fixed income securities, liquid funds or hybrid funds to your portfolio. 

• Nominal Risk

If you have leveraged asset allocation, you can invest securely by reducing risk. This is because your riskier investments are balanced with debt or fixed income investments. With time, your returns can also be high. 

• Allocation Discipline

Financial growth requires self-control and restraint. By utilising asset allocation, you can invest in a more disciplined manner by understanding which percentage of your funds you want to invest in assets of different risk profiles. 

• Stable Returns

By allocating assets across classes, you can have a potentially stable source of income. Since your investment in not concentrated in one type of asset, if it fails, you can make up with returns from your other assets. 

• Diminished Anxiety 

This approach is an efficient way to improve your finances without feeling stressed when one of your investments doesn’t pan out the way you wanted. Since high-return investments involve inherent risk, you can bank on low-return yet safe classes, too. This helps you stay positive and achieve your life goals. 

To reach a state of financial stability, asset allocation plays a key role. If you are facing an emergency or want to keep your investment intact when facing a cash crunch, you can opt for Quick Cash Loan.

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FAQs on Asset Allocation

What is the asset allocation meaning?

It means splitting your investment among assets with different risk profiles, such as debt, equity, real estate and gold. 

Can asset allocation reduce investment risk?

Yes, by investing in assets with varied risk exposure you can potentially balance your portfolio and reduce your overall risk. However, it depends on the asset classes you choose.

Are mutual funds and ETFs part of asset allocation?

Yes, Exchange-traded funds (ETF)s and mutual funds can be a part of asset allocation and help you build wealth. However, these may be high-risk options so you can balance them with debt or fixed income securities. 

Can I adjust my asset allocation based on my risk profile?

Yes, your entire asset allocation approach can be managed based on your risk appetite. For instance, if you are a conservative investor, you can go for 10% equity and 90% debt in your portfolio. 

How can I diversify my portfolio with asset allocation?

To diversify your portfolio, you can invest in various asset classes. Spread your investment in several options to acquire the maximum benefit based on your appetite for risk. For instance, if you want to go for medium risk, divide your portfolio between equity and debt instruments.