India Invest: Asset Allocation is the Cornerstone of Smart Investing
MFNews
India Invest: Asset Allocation is the Cornerstone of Smart Investing
Mumbai: Asset allocation is a key investment strategy in financial planning. Despite its proven relevance across market cycles and macroeconomic situations, it is often ignored. As a result, investors remain biased toward one asset class, exposing their portfolios to concentration risk.
Investors must note that all asset classes like equity, debt, gold and real estate are distinct with different market cycles, valuation dynamics and varying risk factors. Moreover, predicting cycles of an asset class is not an easy task. On top of it, volatility, corrections and rallies are part and parcel of the market which can’t be done away with. The strategy of asset allocation works on the principle of diversifying risks by suitably allocating the funds across various asset classes. Thus, it lets investors have a protective layer in their portfolios by saving them from undue erosion in investment value due to affinity towards one asset class.
Most investors tend to exhibit recency bias, favouring asset classes that have recently performed well. However, they often struggle to cope with sudden declines in portfolio value, which can lead to impulsive investment decisions—ultimately hindering long-term wealth creation.
Therefore, it is wise to go for an investment approach which has risk-mitigation and diversification. And asset allocation mechanism perfectly does the same. Even if one asset class does not perform, exposure to others can balance out the returns and your investment trajectory remains on the sustainable growth trajectory. In fact, this strategy finds a strong analogy with the old saying that one should not keep all eggs in one basket. If the basket falls, so do all the eggs and crack. Thus, wisdom suggests one needs to keep eggs at different places in order to have a certain degree of safety.
For investors, managing asset allocation independently can be challenging. A smart alternative is to achieve diversification through mutual funds.
