Importance and Benefits of Asset Allocation | AU Small Finance Bank
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Importance of Asset Allocation

    Asset allocation refers to distributing your investible surplus across asset classes such as equity, debt, gold, real estate or even holding cash for that matter. These asset allocations change over time depending on a variety of different factors, including the investor’s time horizon and risk tolerance.

    By allocating assets, you are essentially adopting an investment strategy that can balance your portfolio’s risk and reward - keeping in mind your financial goals and investment time horizon.


    What Are The Benefits of Proper Asset Allocation?

    • Optimal Return

    Many individuals invest in an ad-hoc manner. Some investors are either too aggressive or conservative and invest accordingly - as a result, they are unable to earn adequate returns on their investments. Proper asset allocation will help you determine how much return you can expect on your investments based on the investment risks you are taking.


    • Minimizes Risk

    While each asset class has its share of risks and rewards, diversifying your investments dilutes volatility. Asset allocation ensures that portfolio risk is spread across asset classes. For example, investing in equity assets and debt assets will protect your portfolio from experiencing the impact of a dip in any unique asset.


    • Lowers Stress

    Spreading assets across multiple asset classes significantly reduces your stress regarding the safety of your investments. Less stress fosters confidence and helps investors invest in regular intervals. Moreover, proper asset allocation/diversification helps investors cope up with volatility or loss in a much better way.


    • Asset Allocation Maintains Discipline

    Asset allocation ensures the investor does not over-invest or under-invest in a particular sector. It fosters discipline and helps build financial security.


    • Stable Returns

    Asset allocation ensures that you get stable returns over time. For example, you want to invest your savings of Rs. 4,00,000 for a time horizon of 4 years. Based on your financial consultant's advice, you can divide this investment among different classes. A mix of each asset will help you balance your returns.


    Key Takeaways

    • Asset allocation divides your hard-earned investment into various asset classes and gives you the potential to earn higher returns while lowering the risk by diversification.
    • All asset classes don’t move at the same pace or in the same direction and that’s why having the right mix is important.

    To conclude:

    Markets are volatile by their very nature, they can plunge or rise like a phoenix at any time. The right asset allocation strategy will place your investment portfolio in a better position to help you deal with market dynamics. It will ensure that you get closer each day towards achieving your financial goal.

    Remember: When using an asset allocation approach to designing a portfolio, it is important to not focus just on the expected return of that portfolio. The risk associated with an increasing, or decreasing, portfolio return is just as important to the success of an investment strategy.