Definition: Asset allocation is an investment strategy by which an investor or a portfolio manager attempts to balance risk versus reward by adjusting the percentage of amount invested in an asset of a portfolio according to the risk tolerance of the investor, his/her goals and the investment time frame.
Description: Financial assets vary in returns from each other depending on market conditions and user requirements. Almost all asset classes are not perfectly correlated with each other, so diversifying across multiple sectors tends to bring down the overall risk of a portfolio.
Strategic Asset Allocation
This involves allocating fixed weights to various asset classes over the entire investment horizon. The return of the portfolio is then simply the weighted average return of various asset classes. For example, if you invest 60 per cent of your investments in stocks which have 15 per cent returns and 40 per cent in bonds which offer 5 per cent returns, then the mean return of the portfolio is 11 per cent.
Tactical Asset Allocation
This strategy allows short term deviations from the ideal asset allocation to capitalize on market fluctuations or attractive investment opportunities that exist for a small period of time. The investor tends to remain moderately active and once the short term profits have been achieved the portfolio is rebalanced to the original mix.
Dynamic Asset Allocation
This strategy is meant for active investors who monitor their portfolio on a regular basis. The investor tends to modify the allocation percentage of various assets depending upon the how the markets and the economy is fluctuating. User may shift the gains from a volatile asset to less risky assets when markets are correcting or may shift to riskier assets when the markets are booming.
Learn With ETMarkets: Mastering interest rate volatility; advanced strategies for portfolio managementHedging, utilizing financial derivatives like options and futures, is crucial for mitigating risks stemming from interest rate shifts and market volatility. By locking in prices and limiting potential losses, these instruments can safeguard portfolio stability. For example, interest rate futures provide a hedge against rising interest rates, while equity options offer protection when stock prices fall.
In an uncertain time like this, up to 15% of your portfolio can be in gold: Prathamesh MallyaPrathamesh Mallya of Ange One suggests allocating 10-15% of your portfolio to gold during uncertain times and highlights silver's rising industrial demand. He also says if you have both gold and silver, in normal times they should each be 6% of your portfolio. He advises opting for digital investments like ETFs and sovereign gold bonds for better returns. Physical gold remains popular but less favorable for investment purposes.
Who should consider aggressive hybrid funds?Financial planners recommended aggressive hybrid funds for first-time investors because they combine equity and debt, offering reduced volatility. The category manages ₹2.19 lakh crore of assets in 31 schemes and has favorable tax treatment. These funds are ideal for conservative investors seeking automatic asset allocation and moderate risk, with a minimum five-year investment horizon.
Fund Manager Talk: Invested 75% in equity? Krishna Sanghavi says defer fresh allocationMahindra Manulife's Krishna Sanghavi discussed market strategies amid high valuations, recommending caution for those heavily invested in equities. He found large caps fairly valued and saw potential in Financials and Oil & Gas sectors. Sanghavi advised tailored asset allocation, suggesting SIP for lower allocations and deferred investments for higher equity allocations.
Three different types of asset allocation strategiesIf you are confused by personal finance terms, jargon and calculations, here’s a new series to simplify and deconstruct these for you. In the 12th part of this series, ET Wealth explains what asset allocation means.
Three different types of asset allocation strategiesIf you are confused by personal finance terms, jargon and calculations, here’s a new series to simplify and deconstruct these for you. In the 12th part of this series, ET Wealth explains what asset allocation means.
Yen set for weekly fall as US recession worries fadeThe yen rose against the dollar on Friday but still looked on course for its biggest weekly decline since June after the latest batch of U.S. economic data eased fears of a recession and supported bets of gradual Federal Reserve interest rate cuts.
Go for wealth creation, not money creation; learn to be patient: Feroze AzeezFeroze Azeez, Deputy CEO of Anand Rathi Wealth, discussed the importance of patience in investments for financial freedom. He highlighted the need for higher equity investments to combat inflation and stressed focusing on wealth creation over quick profits. Azeez also spoke about understanding different types of risks, including market, inflation, and liquidity risks, for sustainable financial growth.
Nilesh Shah debunks 3 market myths; urges investors to take some risk and invest for real returnsDo not put all eggs in one basket. Be a long-term investor. Anything done in haste doesn't bear fruit. Investment needs time and one has to be patient. Nilesh Shah says Indians should get financial freedom by becoming regular long-and disciplined investors. Do not look at past performance and invest. Please invest in a basket of securities from debt, equity, real estate, commodity.
ETMarkets Smart Talk: Sensex@80K! Sahil Kapoor recommends multi-asset allocation strategy for new investorsSahil Kapoor from DSP Mutual Fund advised retail investors to prioritize a balanced investment approach combining equities and debt. He suggested a multi-asset allocation strategy, warned against high-risk investments like microcaps, and stressed the need for aligning investments with financial objectives. Kapoor highlighted the importance of focusing on quality and large-cap stocks.