Let us understand how we can avoid risk factors in a better way. It can be truly managed by doing a proper Asset Allocation.
So what is Asset Allocation?
First thing is you should have a strategic allocation mix which assumes that you do not know what the future is going to hold.
Merely choosing an investment vehicle based on hear-say and investing a chunk of your money is not going to serve the purpose.
It would help if you decided upon the asset allocation as well. It is a strategy wherein you plan the structure of your portfolio. You look for various assets that can be included in your portfolio. Most used assets are equity shares, bonds, and cash. After that, you decide how much money you will contribute to each asset.
An important aspect of Goal Based Financial Planning. Asset Allocation is popularly defined as the way an investor assigns the assets to different asset classes, according to various factors such as risk tolerance, risk appetite, goals, and investment timeframe etc.
Asset Allocation works. Not just to protect downside but in delivering better returns as well.
Rule of Thumb for Asset Allocation based on age of investor
The basic principle behind age-based asset allocation is that your exposure to portfolio risk needs to reduce with age. Here, it is primarily being referred to as the proportion of equity as a portfolio component.
You can use the thumb rule, i.e. your allocation to debt funds must be equal to your age. In other words, to find your equity allocation, subtract your current age from 100. It means that as you grow older, your asset allocation needs to move from equity funds to debt funds.
Suppose your current age is 25 years. Your portfolio may be composed of 75% of equity funds and the balance 25% among debt funds and cash. In this way, when you reach say 45 years, you can switch to equity-oriented balanced funds. These invest 65% of funds in equity and rest in debt.
Going by the thumb rule, as you approach retirement to say 60 years, you may initiate a systematic transfer plan (STP). It will move your investments gradually from equity funds to a debt fund like liquid funds. From a liquid fund, you may afterwards redeem units to meet your income needs using a systematic withdrawal plan (SWP).
The way Balance Diet plays important role in Health – the same way Asset Allocation helps in Perfect Financial Planning.
Time horizon & Goals while selecting the Product:
Very Short-Term Goals: Very Short Term requirement like as low as 1 day to 1 year.
Short Term Goals: Short Term requirement say 1 year to 3 years time horizon.
Medium Term Goals: Medium Term goals – 3 years to 6 years time horizon goals.
Long Term Goals: Long Term dreams and goals of around 6 to 12 years.
Very Long-Term Goals: Very Long term dreams and goals for 12 to 25/30 years.
