Asset Allocation – Doing It In The Right Way

The investments in the portfolio must be periodically aligned with the risk profile. Dynamic asset allocation funds, like balanced advantage fund, asset allocator fund, etc., allow you to maintain a prudent asset allocation strategy based on the relative valuations.

Shirish Patel
CEO of Prudent Corporate Advisory 

While everyone talks about ‘Asset Allocation’ for your investment portfolio, approaching it in the right manner calls for careful review of one’s financial profile. Financial planning is a relative process, and thus, one must decide upon the optimal asset allocation strategy after considering own income, expenses, financial goals, and risk-bearing ability. 

The first and foremost step is to know yourself, so that the investments can be planned in a manner that best suits you personally. How do you see risk and how do you handle such risk, is something that defines your risk appetite. Many investment platforms allow you to undertake your risk profiling, generally through a series of multiple-choice questions. Since this forms the foundation for the entire process of financial planning, one must ensure that the questions are attempted with sincerity and honesty. This whole process will help you understand if you are an aggressive, moderate or conservative investor and thus, decide on your asset allocation strategy. Further, just like the law of nature says, ‘Change is inevitable,’ similarly, you must review your risk profile on regular basis, at least once every year.

Besides, one must also be clear with their financial goals. The criticality of the goal may also impact the desired asset allocation for your investments. For example, one might be more comfortable with a stable debt portfolio for investments towards child’s education, while for a vacation, the savings might be made in predominantly, equity portfolio. At the same time, investing in asset classes with a better return potential can help you achieve some larger goals with limited savings, but higher returns are generally accompanied with higher risk perception. As such, the investing approach is needed to make a balance between the risk appetite and financial goals. Similarly, in case the lower-income tries to constrain the financial goals at present, one can make use of Step-up SIP, which starts with lower savings, and the monthly investments are steadily stepped up with the increase in income.

Another critical determinant to decide your asset allocation strategy is the investment horizon. While equity may be considered suitable for long-term goals, it may not suit short-term goals, irrespective of financial goals. For example, one invests short-term surplus money in a liquid fund. However, regardless of the equity outlook, it may be prudent to invest such short-term surplus in equity funds. One must also ensure that the asset allocation strategy itself is reviewed on a periodical basis, as the financial goals and investment horizon may change over time. As such, the investments in the portfolio must be periodically aligned with the risk profile. Dynamic asset allocation funds, like balanced advantage fund, asset allocator fund, etc., allow you to maintain a prudent asset allocation strategy based on the relative valuations.

Maintaining a prudent asset allocation is a continuous process in the pursuit of financial prosperity and reviewing the financial planning to align it with the financial profile can be another right step in that direction.

Happy investing! 

The writer is a CEO of Prudent Corporate Advisory Email id : shirish@prudentcorporate.com  Website link : www.prudentcorporate.com