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By Raghav Iyengar
In today’s world, with or without the pandemic, a well-maintained portfolio is vital for investing success. As an individual investor, you need to know how to determine an asset allocation that best conforms to your personal investment goals and risk tolerance.
As investors, the main aim for asset allocation is to minimise risk while ensuring that we get the returns that we are expecting. Mutual fund investments have offered reasonable returns in the past with the help of systematic investment plan, risk management and diversification. However, irrespective of having a sound financial plan, good risk appetite, moderate savings bucket and a good timeline in your hand, one may end up losing money. To generate wealth, diversification is the key.
To strike a balance with your portfolio that best suits your needs and goals, you simply need to follow the following steps:
Determine your goals and risk tolerance
This could largely depend on your age, income, tenure and reason for investment. Those who are starting out young, and do not have a family dependent on them can choose to invest a larger portion of their investments in equity. As our needs increase over time and goals in life change, switch to hybrid funds, offering a mix of debt and equity; thereby not only ensuring that it delivers returns but the risk is also meticulously mitigated. Investors who need a steady source of income with minimum risks should go for short-term funds and liquid funds.
Pick individual assets
Once you have determined your goals and risk tolerance, it is imperative that you pick out the right assets to invest in. With so many options available today, determining the right asset allocation is a complicated task. History has been a testament to the fact that market conditions that cause one particular category of investments to do well, may not necessarily hold true for other asset classes. For example, Covid 19 has shifted the focus of retail investors towards debt and fixed income schemes as opposed to the focus on equity before. When you are considering a particular financial goal, consider a mix of equity and debt investments so that the portfolio is insulated against several market fluctuations. By picking the right group of investments, you may be able to reduce your risk without sacrificing too much potential gain.
Monitor diversification and make adjustments
One of the biggest pieces of advice that financial planners and fund managers have been delivering is the need to take a re-look at your portfolio frequently. This is necessary because over time, certain investments that you thought would outperform and enjoyed a majority share in your asset allocation, may turn out to be ineffective investments. This will impact your overall returns adversely if care is not taken immediately. As the market changes, the value of your portfolio will change. Investors also need to review the investments within each asset allocation category. If any of these investments are out of alignment with your investment goals, you’ll need to make changes to bring them back to their original allocation within the asset category.
Investors need to understand that balancing the portfolio is not a one-time task; something that you do once and then leave it to the fates! All of us need to revisit all these steps multiple times to ensure that the assets we have invested in are aligned towards our goals and expectations.
The writer is CBO, Axis AMC