{"id":8801,"date":"2020-04-20T05:27:51","date_gmt":"2020-04-20T05:27:51","guid":{"rendered":"\/blog\/?p=8801"},"modified":"2020-04-20T05:35:48","modified_gmt":"2020-04-20T05:35:48","slug":"benefit-of-asset-allocation-in-the-portfolio","status":"publish","type":"post","link":"https:\/\/tata-blog.osian.dev\/blog\/wealth-services\/benefit-of-asset-allocation-in-the-portfolio\/","title":{"rendered":"Benefit of Asset Allocation in the Portfolio"},"content":{"rendered":"\n<p>Have you paid attention to your\ninvestment portfolio? Every investment portfolio needs to have a mix of asset\nclasses so that there is an element of balance. This is akin to the famous\nidiom of not putting all your eggs in a single basket. The principle of asset\nallocation applies to mutual fund investments as well.<\/p>\n\n\n\n<p>Before you wonder what an asset class\nmeans, here\u2019s a simple explanation. An asset class is a set of financial\ninstruments with similar attributes. Examples of asset classes include equity,\nfixed income \/debt, cash or gold. Real estate and commodities are also referred\nto as asset classes. Each of these asset classes come with their own advantages\nand disadvantages. For instance, equity is a high risk and high-return\ninvestment, while fixed income or debt instruments are low to medium-risk asset\nclasses. Gold is known as an asset class that helps you hedge or offset the\nlosses from another asset class. Gold is used as a hedge instrument.<\/p>\n\n\n\n<p><strong>What is asset allocation as a strategy, and what are its benefits?<\/strong><\/p>\n\n\n\n<p>An asset allocation strategy balances the\npositives and negatives of each asset class, and ensures that an investor has\nthe appropriate exposure to risk and adequate protection from volatility. A\ngood strategy helps you tap into the positive attributes of every asset class. <\/p>\n\n\n\n<p><strong>The benefits of using asset allocation include:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Diversification:<\/strong> Since asset allocation\ninvolves investing in different classes, there is the key element of\ndiversification which plays a role in reducing risks. Different asset classes\nare impacted differently by market forces or the economy, so you won\u2019t be badly\nhit by risks inherent in one risk type. If you were to purely invest in stocks,\nand if the stock markets crash like the 2008 collapse, you would have to lose\nall your investment. If you had invested in debt\/fixed income assets, you would\nhave reaped the positives of that asset class which would have protected you\nfrom the risk that equities bring. <\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Long-term investing:<\/strong> Asset allocation helps you\nthink long-term and not base your investments on temporary market volatility.\nOn the back of your portfolio following the asset allocation principle, your\ninvestments are not overly affected by fluctuations in the market.<\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Discipline:<\/strong> Thanks to thinking\nlong-term and the diversification in your portfolio, there is an element of\ndiscipline in your investing. Asset allocation helps you focus on your goals\nand the assets that suit your goals. <\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Better returns:<\/strong> Diversification entails\nthat if you are exposed to various asset classes over the long term horizon,\nthus you are likely to outperform the portfolio with a single asset class. This\nis achieved by cushioning your portfolio with an array of assets against market\ndrawdowns in one asset class.<\/li><\/ul>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"571\" height=\"293\" src=\"\/wp-content\/uploads\/2020\/04\/benefit-of-asset-allocation-in-the-1.png\" alt=\"\" class=\"wp-image-8805\" srcset=\"https:\/\/tata-blog.osian.dev\/blog\/wp-content\/uploads\/2020\/04\/benefit-of-asset-allocation-in-the-1.png 571w, https:\/\/tata-blog.osian.dev\/blog\/wp-content\/uploads\/2020\/04\/benefit-of-asset-allocation-in-the-1-300x154.png 300w\" sizes=\"auto, (max-width: 571px) 100vw, 571px\" \/><\/figure><\/div>\n\n\n\n<p style=\"font-size: 12px;\">(Source: Economic Times*)<\/p>\n\n\n\n<p><strong>How does one employ asset allocation in your <\/strong><strong>mutual fund<\/strong><strong> investing?<\/strong><\/p>\n\n\n\n<p>Keep an eye on asset allocation when you\ninvest in mutual funds. There are different types of mutual funds, including equity mutual funds, debt mutual funds and hybrid funds. Equity\nfunds invest a major part of their wealth in equity while investing a minor\nportion in debt instruments. Debt mutual funds invest in fixed income instruments like government bonds and securities.\nHybrid or asset allocation funds are those that invest in a mix of asset\nclasses including equity and debt-related instruments. These funds are further\nclassified into dynamic asset allocation funds and balanced funds. In a dynamic asset\nallocation fund (DAAF), the asset percentage\/proportion is constantly changing\nin line with market variations. Balanced\nfunds typically invest 65-80% of their\nportfolio in equity and the remaining in debt.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"770\" height=\"400\" src=\"\/wp-content\/uploads\/2020\/04\/benefit-of-asset-allocation-in-the-portfolio.jpg\" alt=\"Asset allocation process\" class=\"wp-image-8804\" srcset=\"https:\/\/tata-blog.osian.dev\/blog\/wp-content\/uploads\/2020\/04\/benefit-of-asset-allocation-in-the-portfolio.jpg 770w, https:\/\/tata-blog.osian.dev\/blog\/wp-content\/uploads\/2020\/04\/benefit-of-asset-allocation-in-the-portfolio-300x156.jpg 300w, https:\/\/tata-blog.osian.dev\/blog\/wp-content\/uploads\/2020\/04\/benefit-of-asset-allocation-in-the-portfolio-768x399.jpg 768w\" sizes=\"auto, (max-width: 770px) 100vw, 770px\" \/><\/figure>\n\n\n\n<p><strong>Asset allocation process<\/strong><\/p>\n\n\n\n<p>One of the most common asset allocation\nthumb rule is that your holding in equity should be 100 minus your age. So, if\nyou are 40, you could invest 60 percent in equity and the remaining in debt.\nThere is also a Rule of 110, which works similarly.<\/p>\n\n\n\n<p>However, these are thumb rules. The factor\nthat one needs to keep in mind while investing is risk tolerance. You would\nalso need to assess your financial goals, your net worth, earning capacity,\nyour commitments and then take a call rather than simply relying on age. You\nwould also need to look at the time horizon that you would wish to stay\ninvested in. <\/p>\n\n\n\n<p>Mutual\nfunds have an inherent\nelement of diversification and are the easiest way to achieve asset allocation\nas well. Even within an asset class, you can achieve a certain amount of\ndiversification &#8212; for instance, if you are investing in equity mutual funds, you could pick one that\nhas a mix of investments in small, large and mid-cap companies. <\/p>\n\n\n\n<p><strong>Summing up<\/strong><\/p>\n\n\n\n<p>In conclusion, asset allocation is a strategy that helps you reap the benefits of various asset classes while staying protected against market volatility. Diversification helps you balance the risks and rewards of mutual fund investing. Just look up for mutual fund schemes, whether they are balanced funds, equity mutual funds or <a title=\"Debt Funds\" href=\"https:\/\/tata-blog.osian.dev\/wealth-management.html\">debt funds<\/a> on Tata Capital Wealth portal, and pick one that helps you meet your financial goals. <\/p>\n\n\n\n<div class=\"wp-block-button aligncenter\"><a class=\"wp-block-button__link has-background has-vivid-cyan-blue-background-color\" href=\"https:\/\/tata-blog.osian.dev\/wealth-management.html\">Know More<\/a><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Have you paid attention to your investment portfolio? Every investment portfolio needs to have a mix of asset classes so that there is an element of balance.  <\/p>\n<p><a href=\"https:\/\/tata-blog.osian.dev\/blog\/wealth-management\/benefit-of-asset-allocation-in-the-portfolio\/\">Read More<\/a><\/p>\n","protected":false},"author":1,"featured_media":8803,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":""},"categories":[37],"tags":[],"class_list":["post-8801","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-wealth-services"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.13 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Benefit of Asset Allocation in the Portfolio - Tata Capital Blog<\/title>\n<meta name=\"description\" content=\"Asset allocation is a key investment strategy that helps diversify your portfolio and strikes a balance between risk and reward. 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