Namrata Singh, CFP & Chaitali Shah, MA (Economics)

Asset allocation – the process of distributing investments across various asset classes, such as equities, fixed income, real estate, gold, and cash aims to balance risk and reward according to individual goals, risk tolerance, and investment horizon. This strategy is a key driver of a portfolio’s long-term performance and  an essential approach for managing market volatility.

As the saying goes, “Don’t put all your eggs in one basket“. A diversified investment approach mitigates the risks unique to each asset class, which can be affected by market trends, economic conditions, and asset-specific factors. By spreading investments across various asset classes, investors can reduce the impact of any single asset’s underperformance. When one asset declines, gains from others in the portfolio may help to offset potential losses.

​​According to a recent report from Jefferies (March 2022), Indian households predominantly invest in real estate (49.4%), followed by bank deposits (15.1%), gold (15%), and only 4.8% in equities. This conservative allocation reflects a traditional preference for tangible assets.  A higher allocation in equities may provide better long-term inflation protection, enhancing wealth creation over time.

By harnessing the power of asset allocation, investors can build resilient portfolios that withstand market fluctuations and work toward achieving financial stability and growth.

Asset Mix Strategies: Achieving the Right Balance Between Debt,  Equity and Others

Creating the ideal balance between debt, equity and other assets depends on individual factors such as age, financial goals, and risk tolerance. Here’s a breakdown of how to approach asset allocation strategically:

1. Age-Based Allocation

A general guideline for age-based allocation is to allocate a percentage of equity based on 100 minus your age. For instance, a 40-year-old might consider allocating 60% to equities, while a 60-year-old might allocate around 40%. This approach helps align risk with the stage of life, gradually reducing equity exposure as one nears specific financial goals, thus minimizing potential market risks.

2. Goal-Based Allocation

●      Short-Term Goals (less than 1 year): For short-term goals, a stable, low-risk approach is key. Fixed income instruments like deposits (FDs), Liquid Funds or Ultra Low Duration Funds are ideal for this horizon, providing predictable returns with minimal risk.

●   Medium-Term Goals (1–3 years): With a medium-term outlook, the focus remains largely on secure investments, though a small portion can be allocated to equities to allow for modest growth potential.

●   Long-Term Goals (5+ years): For long-term goals, equities are typically the growth engine of the portfolio. A larger portion in equities allows the portfolio to benefit from market growth, usually outpacing inflation and maximizing returns over time.

3. Diversifying by Asset Class

To meet various financial goals, it’s crucial to diversify across different asset classes:

● Fixed Income: Instruments such as Provident Fund (PF), Public Provident Fund (PPF), FDs, bonds, and debt mutual funds offer portfolio stability and form a secure base.

● Equities: Often the portfolio’s growth engine, equities tend to provide higher returns over the long term and combat inflation effectively.

● Precious Metals: Gold and silver can add diversification and act as a hedge against market volatility

4. Risk Tolerance

Your personal risk tolerance should also shape your asset mix:

● Low Risk Tolerance: If you prefer lower-risk investments, start with a small percentage in equities and increase it gradually as you become more comfortable.

● Higher Risk Appetite: Those with a higher tolerance for risk may opt for a larger equity allocation, given the higher potential for long-term gains.

Personalized Strategy and Annual Rebalancing

Asset allocation is a highly personalized strategy, which evolves as we age, adapting to shifting goals, and as we experience changes in our financial circumstances. Annual rebalancing is crucial to realign the portfolio with your financial objectives. Adjusting  allocations periodically ensures we stay on track, taking advantage of growth opportunities while managing risk appropriately.

Spreading investments across asset classes—fixed income, equities, and precious metals—reduces the impact of market volatility and balances risk with potential returns.

For those uncertain about the ideal asset mix or in need of support with annual rebalancing, consulting a Personal Finance Professional can provide valuable guidance, ensuring your portfolio aligns with your goals and risk tolerance.

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Namrata Singh is a Certified Financial Planner with more than 16  years of experience in banking and wealth management. (namrata@asinvestment.in)

Chaitali Shah, MCom & MA (Economics) is a Financial Coach and was a Financial Economics – Faculty at Wilson College, Mumbai (info@wealthron.com)

(Please note all views are personal)