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Asset- What is asset allocation and why it is important?

What is asset allocation?

Asset allocation is an investment strategy that aims to balance the risk and growth associated with investment schemes. It balances the risk and growth by allocating the total investment among different asset classes. These asset classes differ in terms of the category of risk and returns

Why is asset allocation important?

Asset allocation helps an investor in reducing or rather managing the risk better. This is achieved through diversification of his or her fund into different assets with different risk levels. For instance, An investor invests in equity funds as well as liquid funds. Now with equity funds being more volatile, liquid funds can help balance, when the market acts wildly and becomes too volatile

What is an asset class?

An asset class is a grouping of different investment instruments that show similar characteristics. These investments in an asset class tend to act in a similar manner in comparison to other investments.

What are the different asset classes?

There are three major asset classes namely:

  1. Equities
  2. Fixed Income Instruments
  3. Cash Equivalent or Money Market Instruments.

The recent trend is to also include investments like futures and options, commodities, cryptocurrencies into an asset class or mix

What is strategic asset allocation?

Strategic asset allocation is a portfolio distribution and management strategy. In other words, an investor sets a target allocation for different classes and rebalances the portfolio.

The target allocation is based on his or her:

  1. investment objectives
  2. understanding and tolerance of risk
  3. return expectation
  4. investment horizon.

While rebalancing of the portfolio is done when the asset’s performance deviates from the expected behavior. 

Published on August 3, 2020