Ignoring the importance of asset allocation can negatively affect your portfolio. Selecting the right investment product based on the risk, income and return plays a vital role while investing.
Asset Allocation is nothing but dividing your investment in a different asset class such as stocks, bonds, cash. The variety of asset classes can be in the combination of cash, equity, mutual funds, real estate, bonds, gold, and many more.
The magic lies in how well you diversify your investment so that you incur a minimum loss with higher returns.
Asset allocation vastly depends on the risk tolerance and time horizon of your investment.
1) Define Long term and short term goal
Before allocating asset in any investment product, one needs to be clear whether the investment should be long term or short term, so that your financial goals are not interrupted by any financial emergencies.
2) Re-balancing Asset Allocation
With time, one can consider re balancing the portfolio and mix the asset classes on the present financial conditions or when you near your investment goal.
Note that change in frequent asset allocation will hamper on the long term.
3) Importance of Diversification
Individuals should also look at diversification within asset classes he has chosen, so that he can cover up losses made in one investment. "Don't put all your eggs in one basket" the famous saying holds good in most of the cases.
4) Tax Liability
Before selecting any investment product, one should consider the tax slab he is falling into and investment return after tax deduction if applicable. If this is not considered one may end up paying a tax equivalent to his return.
5) Asset Allocation Depending on Risk
Asset allocation can be done based on your risk appetite. Higher the risk capacity one can expect higher returns on the investment. But such investment will be too risky.
One can choose from portfolio particularly based on the risk capacity models such as Aggressive, Moderate or Conservative.
6) Benefits of Asset Allocation
Investing in a different type of asset classes will reduce your risk on the investment. By asset allocation, one will stay invested which will help him to fulfill his long-term goal.