Asset Allocation

Do You Know Asset Allocation is the Key to a Successful Financial Planning?

We all know putting all eggs in one basket could be dangerous if the basket goes bust. Similarly, keeping all your savings and investments in one class of assets could be either risky or would not give a reasonable mix of return.

There are several classes of assets available for an individual to park their savings.  Some are risky, some are safe, some are reasonably safe, and some are somewhat risky. Some are liquid, some are illiquid, some are anything in between. Some are of short-term maturity, some are of long-term maturity, and some are in between,

Instruments Tenure Risk Return
1 Post Office Deposits Schemes

PPF

1 to 5 Years

15 years

Nil

Nil

Low

Low

2 Bank Fixed Deposits (PSUs) 1 to 5 or more years Nil Low
3 Bank Fixed Deposits (Non-PSUs) 1 to 5 years Medium Low
4 Company Fixed Deposits 1 to 5 or more years High Medium
5 Govt Bonds 1 to 20 years Nil Low
6 Private Company Bonds 1 to 5 or more years Medium Medium
7 Mutual Funds – Debt Any time liquid-able Low Low
8 Mutual Funds – Balanced Any time liquid-able Medium Medium
9 Mutual Funds – Equity Any time liquid-able High high
10 Life Insurance – ULIPs 5 Years or more Low Low
11 Equity Shares Any time liquid-able High High
12 Chit Funds High Medium
13 Real Estate Liquidity is not easy Medium High
14 Gold Any time liquid-able Low Low
15 There are many other instruments. Know and evaluate based on these aspects of risk, return, and liquidity.

“The difference between success and failure is not which stock you buy or which piece of real estate you buy, it’s asset allocation.” Tony Robbins

There are several schemes under each class of assets.  Therefore, suitable asset allocation is an important aspect of personal finance management. Imbalanced asset allocation can not only affect your return on investment but it could also hamper the liquidity when it’s needed.

For optimum asset allocation, investment in a range of safe assets class is necessary.

There are primarily three things to consider while allocating assets.

Handpicked related post: How to Become Rich With Less Income

Risk vs Return

Risk vs Return

The number one aspect is the risk attached to the asset class. Risk is of two types, one market-related risk and another is a scam-related risk.

Equity shares are risky but it’s a market-related risk. But MLM schemes and Chit Funds are prone to scam-related risk.

The famous Sharda Chit Fund, Rose Valley Chit Fund, and Pan card club scams are well-known examples. Avoid this asset class altogether. These ere unregulated schemes and subject to high risk.

On the other hand, equity shares of good and leading companies though by nature are risky but have the potential to offer the highest return in the long term. Unless you are totally risk-averse, you should consider equity shares as an asset class for investment.

Short term vs Long term

Short term vs Long term

This is another vital aspect. Life stage events in our life require money. For a young couple, it starts with children’s education, children’s higher education, own/parents healthcare, children’s marriage, own retirement.

Depending upon the stage of life, you are in, you need to plan the timing of your investment maturity. This planning would avoid any premature withdrawal of investments. Usually, premature and unplanned termination of investment has a cost. You can avoid that and buy peace of mind through adequate time planning.

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Liquid vs IlLiquid

Liquid vs illiquid

This is another aspect vital for asset allocation. There are many illiquid rich people. They are asset rich but cash poor. Do not get into this trap. It is always advisable to keep some assets in cash/bank balance, and assets like fixed deposits / mutual funds which can be liquidated in case of an emergency.

Life insurance (term plan) and health insurance both are expenses but are important expenses. You will not earn any return on it but they are useful in the event of any untoward incidence in life. These are the risk management aspects of financial planning.

“An asset allocation plan is based on your personal circumstances, goals, time-horizon, and need and willingness to take the risk.”  Michael LeBoeuf

Allocate your assets according to your appetite and your specific requirements. As our life is dynamic and subject to mang surprises and unplanned events, asset allocation is not a one-time job, it’s a dynamic thing to match the changing requirement of our life.

Financial planning has become very complicated as the products under each asset class and companies offering such products have multiplied manifold. Unless you are financially savvy, you would need expert advice.

But to keep it simple you need to keep 5 things in mind.

  1. Diversified asset allocation is necessary
  2. Divide between risk and return
  3. Divide between short term and long term
  4. Divide between easy to liquid and less liquid
  5. Insurance (life and health) is mandatory

“The most important key to successful investing can be summed up in just two words-asset allocations.” Michael LeBoeuf

You may also like to read: When Secured Investment Becomes Unsecured & Risky

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