In simple layman terms, asset allocation is investing in different asset classes to make sure that you get proper returns in the future. But, before you make any major decision, there are numerous things that you need to check out. As an investor, you need to make sure that you properly allocate your hard earned money in these different asset classes to fulfill your investment objective.
When it comes to mutual funds, asset allocation depends on the below-mentioned factors:
- Age Bracket
What age bracket you fall in determines what your plans should look like. Young people who have a constant income of money can always afford to invest more in equity funds. They could afford to take the risk and aim to generate better returns. After all, when you are young, you make mistakes & progress and learn from both. At the same time, if you are retired or close to retirement, choose debt funds, as they are less risky and aim to give moderate returns.
- Risk Factor
It pertains to how much you are ready to risk. The more you are prepared to risk, the better you go for equity mutual funds. The more risk-averse, the better you tilt your portfolio towards debt instruments.
- Investment Horizon
This is for what period you want to invest your money. If it’s around a year or less, go for debt mutual funds. If you have a long-term horizon, then you could go for equity. As in the long run, equity tends to give higher returns. However, the investment horizon of an investor also depends upon the investment objective of the investor. If you want to invest your money for your kid’s marriage that will tentatively happen in the next 15 years then you could focus on equity mutual funds.
As far as asset allocation is concerned, it is done in three major forms, Equity, Debt & Gold.
Equity Mutual Funds invest in Equities of different companies. The portfolio may usually comprise companies from different sectors. There are sector-specific funds too where you can expose your money to a particular sector. Equity Funds are generally considered riskier and have potential to give good long term risk adjusted returns.
Debt Funds or Debt Mutual Funds Significantly invest the money in fixed-income securities like government securities, debentures, corporate bonds and other money-market instruments. These funds are generally considered less risky than Equity.
Debt funds are meant especially for investors with relatively less appetite for risk and intend to earn returns higher than other traditional safe investment avenues. Most Debt funds NAVs tend to fluctuate less than an equity fund. They primarily invest in corporate, municipal or government bonds.
Gold Mutual Funds are a type of mutual funds that directly or indirectly invest in gold. They are an excellent way to invest in gold without having to purchase it in its physical form. This reduces the hassles of storing, insuring and paying making charges. You can invest in gold with as little as Rs. 500/month.
Always remember, never run your chariot with a single horse. Always have more than one horse when you want to reach your destination. So, in case of any problem with one horse, your chariot will still reach its destination. Hence, even though your speed may get affected, you will still keep moving closer to your destination.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.