There’s no doubt that stock markets are quite volatile in nature. Though, long-term investments usually show upward trajectory, they can either go upwards or downwards in the short run. This results in investors panicking and taking rash decisions which could be quite detrimental to one’s portfolio. In times like this, asset allocation can play a huge role in calming you down. How, you ask? Let’s understand.
Every investor has an appropriate asset allocation mix depending on their income level and age. Before we dive into that, here are some common rules that apply to all investors irrespective of their wealth stage and age:
- Emergency fund – It is very important to have an emergency fund equivalent to your three to six months of your living expenses. These funds show be invested in liquid instruments such recurring deposit (RD) and liquid funds.
- Equity allocation in a portfolio is designed to help you with wealth creation in the long run. Thus, it is suggested that equity allocation should be on the higher side during the early stages of investing as you have the required time to allow your investments to show their full potential.
- Fixed-income securities such as debt funds are used to meet short-term goals likely in a time period of one to three years. If you are nearing retirement, you must systematically transfer your funds in these securities.
- If you decide to invest in gold in any form (bullions, bars, coins, funds, etc.) try to cap it at 10% of your overall investment portfolio. Remember rather than owing gold in physical form, it is recommend to invest in gold mutual funds or ETFs (Exchange-Traded Funds) as it is more convenient to hold them digitally with no charges to store them, or the fear of theft. Also, they are believed to produce better returns in the long run.
- Diversify your portfolio. Experts cannot stress enough the importance of investing and diversifying one’s portfolio. Diversification helps to mitigate the losses that might occur from any one set of asset class. Thus, an investor is advised to diversify their investment portfolio across asset classes (fixed-income securities, equities, money market instruments, cash and cash equivalents, etc.), sectors (pharma, infrastructure, banking and finances, etc.) and location (international funds and domestic funds)
In uncertain times when there is huge market volatility, it is easy and understandable to get confused and stressed. However, if you have your asset allocation strategy in place, it can greatly contribute in provide you with much-needed peace and keeping your stress levels to a minimum. The basic idea behind asset allocation is that occasional underperformance of any asset class or type of investment does not adversely affect your investment portfolio and the ability to meet your financial objectives. Clearly understand where to invest money and strategise the right allocation strategy for your portfolio. This is the first step towards financial planning. You can make investments in two ways – either through lumpsum investment or SIP investment. Happy investing!