Allocating assets is like adding the right ingredients to a dish and cooking it for the exact duration.
You can note that the proportion of ingredients in a dish and the type of assets differ from person to person. Therefore, deciding the best asset allocation strategy for yourself can start with knowing yourself.
Here are steps to deciding an asset allocation strategy that can suit your goals:
(1) Know Yourself
Before you go on a quest to find the best allocation strategy for yourself, it’s better to know yourself.
Just like each of us is different from one another, our financial goals, risk appetite, investment horizon, and the way we spend money are also different.
You can start by discovering your risk appetite or willingness to take risks. This can depend on various factors like your income level, age, location, dependants, health conditions, and more.
Knowing your risk appetite will help you select assets for your goals in a better way. Check out the next point to understand how.
(2) Know Your Goals
Once you know yourself, you can move towards understanding why you want to invest.
These reasons can make up your financial goals.
Your goals can be divided into short-term (buying a car), medium-term (children’s education), or long-term (retirement planning).
To find the right horizon for your goals, you can find their real value and compare it with your income level. The real value of your goals is the current monetary value of your goals plus expected inflation.
(3) Know Your Investments
Just like you have a specific risk appetite, different investments also have a different risk profile.
For example, in mutual funds, the degree of risk can be measured with the help of the risk-o-meter. A mutual fund risk profile on the risk-o-meter is transparently stated on the first page of the fund’s SID (Scheme Information Document).
You can choose the mutual funds whose risk profile can suit your investment horizon or goal duration.
For example, an equity-based mutual fund can help you beat inflation in the long run. Therefore, they can be suitable for long-term goals. However, for short-term goals (horizon of 1 to 3 years), the short-term volatility of equity can make them riskier. Thus, for short-term goals, you can opt for debt-based funds that can offer you lesser volatility and risk compared to their equity counterparts.
There is another type of mutual fund, called balanced or hybrid mutual funds, that can offer you the lesser volatility of debt and inflation-beating power of equity investments. You can choose them based on your goals.
(4) Know If You Are Going Right
Just like forming the best portfolio, monitoring and rebalancing it from time to time is essential. Your goals and risk appetite can change for different age groups, so can your asset allocation strategy. Therefore, it is important to track your investments to know if they are moving towards your goals.
Once you know all the above points, you can decide the best asset allocation strategy.
Remember, the best asset allocation can differ from person to person. Therefore, you should avoid making investments on the advice of friends, family, peers, or relatives.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully