Deciding on a right mix of debt and equity in your overall investment portfolio is not a cakewalk exercise. And in the financial world which constantly reels under high volatility, you need to be fast gearing to rebalance your portfolio with the right asset allocation time and again. So, in respect of your overall financial portfolio or to better plan your MF investments, here is suggested the best way forward to plan your asset allocation strategy.
The age-old thumb rule of 100 minus age with respect to asset allocation in debt and equity; with 100- age exposure in equity and the rest in debt, which puts all individual of the same age in a similar category fails to meet individual goals. As two individuals of the same age group might have entirely different financial goals, liabilities in future course, risk appetite and personal financial standing.
So, the universal application of the formula is not advisable. More so, an investor should make an exposure in the two classes depending on his future financial goals.
Further it is suggested that the ancient rule was put forth considering the fact that in old age individuals need a constant source of income to meet their livelihood which ought to come from their investments so then the equity exposure should be minimal.
However, with changing times, experts opine to have exposure in debt class for fixed income only to the extent that it is able to compensate for your living expenses at your retiring age. Additionally, more and more exposure should be kept in equities to maintain the value of your capital. So, with a considerable time horizon in hand with respect to your financial needs you can partake more of your investment in equity without compromising on your comfort level.
So , accordingly an investment in mutual funds is also betted upon, as say a person with only 5 years time horizon, may not be able to reap the returns from small and mid cap mutual funds who take ample time to give superior returns. Thus together with a dynamic portfolio rebalancing, an individual may go with goal-based investing.
Further upon, the closer you reach your goal; your investments should be diverted to safer avenues as debt mutual funds or fixed deposits such that market volatility does not falter your investment decision.
Debt assets should also not be forgotten at the same time that go well in providing stability as well security for your returns.