What is an asset allocation plan?
Asset allocation is the distribution of investments among asset classes. Asset classes include different types of stocks, bonds, and mutual funds. It is a significant factor in determining your investment return relative to risk. Proper asset allocation maximizes returns and minimizes risk. This is because different classes of assets react differently to economic upswings or downswings. Allocation differs from diversification in that it balances a portfolio among different classes of assetse.g., growth stocks, long bonds, and large-company stockswhile diversification focuses on variety within an asset class. Generally, allocation among six or seven asset classes is recommended.
Asset allocation is the distribution of investments among asset classes. Asset classes include different types of stocks, bonds, and mutual funds. It is a significant factor in determining your investment return relative to risk. Proper asset allocation maximizes returns and minimizes risk. This is because different classes of assets react differently to economic upswings or downswings. Allocation differs from diversification in that it balances a portfolio among different classes of assets e.g., growth stocks, long bonds, and large-company stocks while diversification focuses on variety within an asset class. Generally, allocation among six or seven asset classes is recommended.
An Asset Allocation Plan (AAP) is about not putting all your eggs in one basket. Recollect the retirees who invested their pension money in chit funds and lost everything or the investors in dot com stocks? AAP is about minimising risk by spreading the investment across classes so that the risk is diversified and reduced to some extent. The major asset classes are: • Equity – Representing highest returns historically with the highest risk. • Debt – Such as FDs, Bonds, Pension / Provident Funds. These investments have a fixed return. • Cash – Primarily used as a reserve for a rainy day. Cash helps in uncertain times-and is best to invest in short term investments that have capital guarantee and low interest. • Real Estate – Either as a primary home or land / through RE funds. • Alternate assets –Commodities like gold.
