Financial planning for everyone

What is Asset Allocation?

How many times have we heard the saying ‘Don’t put all your eggs in one basket”? This is what exactly asset allocation is. It is spreading out your assets into different avenues of investments.

Asset allocation is dividing your investments among different asset classes like bonds, equities, insurance, real estate, gold, fixed income securities, cash etc. The reason is each asset class behaves differently depending on the market conditions. For example, some assets like bonds are useful in creating a portfolio of investments because bonds behave very differently to equities. Bonds issued by Government are considered as one of the safest forms of investments.They often offer lower but consistent returns. If there is a fall in the stock market, this provides as a safety net. So diversification reduces the risk. Asset allocation for each individual has to be tailor made. One can choose the asset classes depending on the risk appetite.

The factors to consider before choosing asset classes are: Risk tolerance, Time horizon and the objectives of the investment.

The different objectives of asset allocation models can be:

1. Preservation of Capital

Cash and cash equivalents such as money markets, treasuries and commercial paper often compose 80% of these portfolios.

2. Income

Designed to generate income. But returns are generally modest.

3. Balanced

A mix of assets that generates cash as well as appreciates over time with smaller fluctuations in quoted principal value than the growth portfolio.

4. Growth

Designed for those that are just beginning their careers and are interested in building long-term wealth.

Age based – Asset Allocation

Though there is no hard and fast rule for asset allocations for different age groups, here are 5 general age based allocations which are recommended for retirement planning:

The general thumb rule used here is:

% of assets in equity= 100- your age

	This is ideal for people who are just beginning their career and don't have much responsibilities. Risk appetite is much better in this stage of life.
	This is ideal for people in their prime earning years . This is the stage to build retirement nest egg.
	This is ideal for people looking for stability and moderate growth as retiremnt age is approaching.
	This suits people who are retired and expect steady income and can take moderate risk.
	This suits people who are retired and want to preserve their capital and earn regular income.

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