What is 'Asset Allocation'
Definition: Asset allocation is an investment strategy by which an investor or a portfolio manager attempts to balance risk versus reward by adjusting the percentage of amount invested in an asset of a portfolio according to the risk tolerance of the investor, his/her goals and the investment time frame.
Description: Financial assets vary in returns from each other depending on market conditions and user requirements. Almost all asset classes are not perfectly correlated with each other, so diversifying across multiple sectors tends to bring down the overall risk of a portfolio.
Strategic Asset Allocation
This involves allocating fixed weights to various asset classes over the entire investment horizon. The return of the portfolio is then simply the weighted average return of various asset classes. For example, if you invest 60 per cent of your investments in stocks which have 15 per cent returns and 40 per cent in bonds which offer 5 per cent returns, then the mean return of the portfolio is 11 per cent.
Tactical Asset Allocation
This strategy allows short term deviations from the ideal asset allocation to capitalize on market fluctuations or attractive investment opportunities that exist for a small period of time. The investor tends to remain moderately active and once the short term profits have been achieved the portfolio is rebalanced to the original mix.
Dynamic Asset Allocation
This strategy is meant for active investors who monitor their portfolio on a regular basis. The investor tends to modify the allocation percentage of various assets depending upon the how the markets and the economy is fluctuating. User may shift the gains from a volatile asset to less risky assets when markets are correcting or may shift to riskier assets when the markets are booming.
Related News
- Nilesh Shah’s tip for investors: Stick to asset allocation dharma. Don’t chew more than you can affordNilesh Shah says that he always recommends that people follow their asset allocation dharma. If they are too much over-invested into equity, there is no harm in taking profit. If they are under-invested in equity, then there is no harm in investing even at this level, but with a longer-term horizon.
- Focus on asset allocation; stay invested for long term: A BalasubramanianBut with respect to the investment I think every investor would have their own risk appetite and asset allocations would play a very major role. Therefore, irrespective whatever the market condition, one should not move away from asset allocations focus and stick to the asset allocation focus.
- Decoding momentum funds: What you need to knowMomentum funds select stocks based on recent performance for continuity. The 17 funds in this category include both index funds and ETFs, with a tracking error of 0.3 to 0.5% in passive funds. High-risk investors are ideal for these funds, with recommended asset allocation of 80% in equity and 20% in debt, says Chirag Muni.
- Which are the best asset classes to own over 1-year, 3-year & 5 years? Nilesh Shah answersNilesh Shah says up to one year, he will recommend an arbitrage fund for a high taxpayer or debt funds, money market funds and short-term bond funds where one could have the limited benefit of a drop in interest rates. Between one to three years, one can go towards longer duration bond funds. Post-budget, one can also look at investment in precious metal.
- MF Talk: Why smart investors are turning to multi-asset portfoliosInvestors aiming to maximize 'alpha' are going for multi-asset portfolios with strategic asset allocation. Chirag Muni of Anand Rathi Wealth discusses the importance of asset allocation for portfolio performance and capital protection.
- GAIL, PNB, IREDA among PSU stocks that mutual funds exited before election resultsMutual funds sold shares in several PSU stocks in May ahead of the June 4 outcome with GAIL (India), Punjab National Bank (PNB), Power Finance Corporation (PFC), NHPC and Indian Renewable Energy Development Agency (IREDA) witnessing complete exit by individual mutual funds.
- ETMarkets Smart Talk: There will be FOMO among long only FIIs in Modi 3.0: Sorbh GuptaOn the day of the result, the market experienced increased volatility. But we anticipate that this volatility will lessen over the coming days and that the market's attention will eventually switch to macro and solid fundamentals, which continue to remain strong.
- ETMarkets Smart Talk: Modi 3.0 unlikely to be over-populist at the cost of compromising fiscal discipline: Amar AmbaniIn my opinion, the election event is done and dusted, and the market won’t read too much into it, to endure drastic corrections akin to the knee jerk reactions seen on poll outcome day.
- When a decade is a short time in the marketA study of the long-term returns of Sensex and equities highlight the volatility and significant variations over decades. It also questions the perception of gold as a safe haven asset.
- When a decade is a short time in the marketA study of the long-term returns of Sensex and equities highlight the volatility and significant variations over decades. It also questions the perception of gold as a safe haven asset.