For a young investor, there would not be an important concept more than asset allocation strategy i.e. diversifying your investment portfolio with the right mix of mutual funds (MF), stocks, fixed deposits (FD), real estate etc. A great asset allocation strategy makes sure that your portfolio is well diversified and reasonably aggressive to help you meet your financial goals without undue risk.
Asset allocation is a strategy to provide a balance between the risk and reward by linking it to your financial goals and risk appetite.
Why is asset allocation so important?
The objective of asset allocation strategy is to get you a return on your investments while still managing the risk inherent with any investment option.
Because every asset class has a potential risk and there will always be a market risk involved with any of your investments say real estate and gold market which has seen a great run from 2003 & 2006 right till 2013 respectively, both the asset class is not generating any returns over the last few years. Similarly stock market and MF investments always carried a market risk, over the past few years, we have had a great run and returns from the market and barring few correction, may continue to see the same trend. The stock market also has its downfall or a dull period. If you look at the fixed instruments like FDs or PPF or PF, there also, the interest rates are falling for the last two-three years. So what is the moral of the story, you can’t eliminate this risk with respect to any investment product and you can’t even be wasting your money by keeping it in your savings account because you need to beat the inflation.
So, to mitigate the big risk of investing in any one or two products and getting exposed to the risk as mentioned above, you have asset allocation strategy which helps you reduce those risks, a smart asset allocation does help you avoid these risks.
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