5 Golden Rules To Create Your Asset Allocation Plan (2024)

As an investor, you can invest your money in various assets such as equity, debt, gold, real estate, among others. The allocation of money into one or more of such assets is called asset allocation. The actual mix of assets that you hold in your investment portfolio depends on the number of years you wish to allocate to achieve your goals and your risk appetite.

Having an asset allocation plan in place helps avoid making ad-hoc decisions while investing. Here’s all you should know about it.

Set Your Goals Before Investing

Your asset-allocation should not change as per the expectation of returns from various assets. Rather, your asset allocation should be based on your investment objective, risk-appetite and the years left to achieve the financial goals. However, based on the actual performance, you may have to rebalance your portfolio to stick to the original asset allocation plan to meet your long-term goals.

At the start of any calendar or financial year, get clarity on your financial goals before allocating funds towards equity funds, debt and gold-backed investments.

Remember, the key to generate a high risk-adjusted return in one’s portfolio is the right asset-allocation. The final return in your investment portfolio is a function of the allocation across various asset classes such as equity, debt, gold, real estate, etc.

Don’t Juggle Your Investments in the Short-Term

The temptation to move money from one asset to another based on short-term performance should be avoided. If you have already allocated funds towards assets based on your medium-to-long term goals, the shorter events need not be given importance. Juggling between assets and investments incurs cost and may prove futile over the long term.

While equity as an asset class has shown a growing momentum, allocating funds towards it for goals to be met in the long-term future is ideal. Within equities, equity-oriented mutual funds fit the bill for a retail investor looking to save for long-term goals.

Only those who have goals to be achieved post at least 10 years of investment should consider equity mutual funds either through lump sum or the systematic investment plan (SIP) mode of investment.

For goals that are at least three years away, the debt mutual fund representing the debt asset class can help investors save taxes.

Time in the Market is More Important Than Timing

To invest in equities, those investors who continued with their SIP investments even after the market crash last year stand to benefit over those who tried to capture the lows of the market and redeemed their investments.

New and existing SIP need to continue with their investment simply because timing the market has not worked well for most retail investors.

More than timing, the “time in the market” matters as SIP investing brings the best out of volatility in equity backed investments such as equity mutual funds.

As an equity mutual fund investor, keeping track of short-term events may be a futile exercise. Several studies done in the past have shown that compared to other asset-classes, the equities deliver high risk-adjusted real return over the long term. Therefore, to maximize the potential of equities, it is better to link investments to your long-term goals, with a de-risking strategy in place, to ride out the volatility nearing the goals.

Consider Taxation To Evaluate Returns

In 2020, the central banking authority the Reserve Bank of India (RBI) had cut the repo rate by almost 115 basis points, thus signalling lower interest rate. Debt funds across various tenures generated almost 9-12 percent returns in 2020.

This low interest rate may be hard to sustain in the long-term and hence booking profits from debt funds and deploying the gains into other assets can be considered but only after factoring in taxation, especially if the short-medium term goals are nearing.

Diversification of Assets Can Help Make Better Returns

Historically, it has been established that performance of major asset classes is not in tandem over the long-term. The performance of various asset classes depends on factors that are unique to them. The economic and other factors that have a positive impact on one asset-class often result in a downturn in another asset.

Therefore, if your money is distributed across assets, the likelihood of your portfolio maintaining its value is high. Diversifying across assets will help manage risk inherent to specific asset classes. If returns in one asset class falls, the balance may be maintained by the better performing asset on your portfolio. Simply put, in the asset allocation process you are not relying or banking upon any one asset to perform rather spreading the risk-reward ratio across the asset classes.

Bottom Line

Future is uncertain and it may throw some surprises when it comes to finances. To keep fear, uncertainty and doubt at bay, a robust financial plan in place with a 360-degree approach towards protection and investments is important. With savings earmarked across asset classes in the right proportion, you can achieve your long-term goals with ease.