Asset Allocation is the dynamic portfolio of your investment.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
Asset allocation is mutual funds that are invested in a varied assets class. The asset allocation could be in the form of equity oriented, debt-oriented, or even asset classes like gold, other metals, and commodities. One can say that asset allocation is a balanced combination of a bond, equity, which includes stocks, bonds, real estate, and equity funds.
The work of the fund manager is to keep track of the investments and to make necessary changes based on market performance. We all are aware of that, equities are considered to be the highest return generating asset class. But there is the highest degree of risk involved and also a fixed deposit is considered to be less risky but we also there is a low return on investment. So investing in across different asset classes can earn returns by minimizing the risk.
The magic of diversification:
Diversification is where the money is divided into different investments to reduce the risk. Diversification is a strategy that can be summed as “Don’t put all your eggs in one basket”. You are better diversified if you spread your investments within each asset class. Which means holding a number of different stocks or bonds, and investing in different industry sectors, such as health care, consumer goods, and technology. So if one is doing poorly, you can balance it with other holding sectors that are doing well.
Feature of asset allocation
The main aim of asset allocation is to benefit from more than one asset as well as to reduce the risks that are associated with one particular asset.
Different types of asset allocation funds:
- Static asset allocation funds
- Dynamic asset allocation funds
Static allocation funds
Static allocation funds have a decided percentage of fund allocation in the different asset classes. One of the most popular funds is a balanced fund which invests their 65% of their assets in equities and rests in debt.
Dynamic asset allocation funds
These allocation funds return is more than fixed deposits or debt funds because they invest in equity. Dynamic funds are riskier than fixed deposits as well as debt funds. The returns from equity-oriented dynamic asset allocation funds enjoy a favorable tax treatment in comparison to debt or fixed deposits. The returns are tax-free if sold after a year.
Importance of asset allocation funds
The investor can invest in different asset classes and can diversify their portfolio.
- The investor can earn better returns
In asset allocation funds the investor can invest in different asset classes and therefore it earns better returns.
Who should invest in asset allocation funds?
We all know the equity asset class helps to beat inflation. But on the other hand equity investment are not stable funds. Asset allocation investment is been divided into two categories one is the funds which are invested into asset clause and others are invested into equities. This helps to generate stable returns while reducing the risk.
Tax for asset allocation
There is 20 percent taxation with indexation, for long term gains of 3 years and over.
The main idea of allocation of asset is to benefit the appreciation of more than one asset as well as to reduce the risk which is associated with one particular asset. However, it’s also important to make investments based on your risk appetite and investment horizon. After all, you are unique and so are your investments.