Asset Allocation

An investor has three basic criterion's for investment namely: 

• Period of investment, 
• Returns and 
• Risk tolerance. 

The investment portfolio aims at implementation of a strategy that balances the risk of the investor in return of the reward gained by him. It is a strategy aimed at adjusting risks in the overall portfolio than on individual assets. This helps in minimizing the fluctuations and maximizing return on investment. It works on the principle of how well your money is divided in categories of assets that bring out the best combination of rewards.

Statistically, the expected return rates for different investments are calculated using correlation and variance tools. The aim of the investor or financial planner is to diversify the funds among the assets such that the overall risk gets reduced. It is necessary to note that assets perform differently in different economic conditions at variable time periods.

For example, if the available fund set aside for asset allocation is Rs 10 lakhs. The investor shall invest in Equity(50%), Debt funds(25%), Gold(15%), Monthly Investment Plan(MIP)(10%). All of the above generate income at a different rate at a different time period for better results. 

This helps in reducing the risk from each investment for income received. It is necessary to maintain the ratio of investment through the period of investment. Any additional funds that the investor wants to put in, shall be ideally invested in these assets in the above ratio.

Thank You
Regards
Author- Kaushal Shah
Kautilya
IBS Mumbai