Asset Allocation: One of the important tool for investing

Asset allocation is an investment strategy which seeks to strike a balance between risk and reward by adjusting the percentage of each asset in an portfolio based on the investors risk appetite, financial goals and time horizon of such goals. The asset allocation is done to minimize the volatility and maximize returns. The process involves investing money across asset classes which do not react to the same market forces, in the same way an at the same time.

Asset allocation would vary from one investor with that of the other. For instance, an aggressive investor would invest 75 per cent into equity mutual funds, 20 per cent in debt mutual funds and 5 per cent in gold mutual funds. On the contrary, a conservative investor would invest 20 per cent into equity mutual funds, 75 per cent in debt mutual funds and 5 per cent in gold mutual funds.

Financial markets always gives surprises and it becomes very difficult to understand which asset class would go up or down. For example, equities may be rising, while gold may be falling and visa versa. However, if your investment is spread across asset classes, you may earn better risk adjusted returns. It is believed that in the long run, maximum part of the returns comes from proper asset allocation. Asset allocation also needs to be reviewed at least annually. If in case any asset class has moved up or down by 5% of targeted asset allocation, then it needs to be re-balanced.