ASSET ALLOCATION

To obtain his objective, an investor allocates his money across different asset classes like gold, equity, bond, FD, etc.

Understanding the risk and return of various asset classes is the first step in the process. Asset allocation is specific to a person.

In the past few months, I have made two main observation:

1. Many investors have a high portion of the debt instrument (almost 90%) in the form of Fixed deposits, PPF (Public Provident Funds) & Bonds. Thus, they lose opportunities that equity offers. Furthermore, returns of Debt instrument decreases as the economy matures. Return on the fixed deposit decreased from 10.5% in 2001 to 5.5% in 2020. Return on PPF decreased from 12% to 7.10%.

2. Equity and Debt allocation based on age is very popular in printed media. Equity Allocation – (100 – Age)% and Debt Allocation – Age%. For a 26-year-old person, Equity Allocation – 74% (100 -26) and Debt Allocation – 26%. But it is irrelevant because age is just one of the many factors while deciding Asset Allocation. Risk profiling is a crucial step while arriving at the allocation.

Before deciding on Asset allocation, please understand these three things-

1. Risk & Return of various asset

2. Taxation of asset

3. Your objective.