As cliché as it might seem, the title is the very core of asset allocation. While it may be thrilling to see your portfolio groove to the tunes of the market while it's up, the same market makes one desperately wait for half-past three when there's bloodshed all around.
So, how does one analyse risk versus return and allocate the assets so that they are hedged comfortably against a bust and can enjoy returns during the boom? While we don't claim to make you the next Buffet, this blog will help you make wiser decisions with your money!
While we feel metaphors are a great way to put forward the points that seem tricky otherwise, the same isn't the case with asset allocation, and a grown-up (as they say, however) definition would probably explain the field in a better way. So, asset allocation divides the available asset into stocks, bonds, cash, and real estate, among many others.
A well-established fact in the markets remains that not all assets move unidirectionally, simultaneously. High inflation rates might result in a northward movement in markets. In contrast, an attempt by central banks to battle inflation might upset the indices. Although it might not be evident at all times, a clear correlation between asset classes is a perfect way to hedge one's money against the evil spells of the economy.
All said, asset allocation could be anything but a one-size-fits-all concept. A tailor-made allocation based on the investor's preferences is probably the best way out. Here are some of the ways to plan one's allocations.
While a long-term investment remains immune to market fluctuations and hence might see a more significant portion invested in the market, an investment with short-term goals, on the other hand, must ensure capital protection and liquidity, and thus instruments like short-term debt instruments and low-risk investments may constitute the more significant part of the pie.
Every investor has a specific risk appetite, and identifying and tailoring one's portfolio around it is the real deal! Investors with a greater risk appetite might invest a significant portion of the portfolio in historically volatile assets. In contrast, one with a lower risk tolerance might go for steady investment instruments.
Risk and returns in the investment world are like two sides of the same coin. Hence, an investor must carefully analyse the aimed returns and expected risks before investing. This helps one choose the suitable asset classes and set realistic aims for returns.
Now that we have a working knowledge of what the term stands for and some of its associated dynamics let us have a look at the available asset classes.
Equity of the listed companies is one of the most popular ways of investment. There are various ways to do the same: stock purchases, mutual funds, and hedge funds.
This asset class serves the dual purpose of liquidity and investment opportunity. Some of the options in this class are currency, short-term T-bills, and other short-term debt instruments. These are generally considered a safer investment option.
Several options in the market allow investors to park the money for a long time while crediting the accrued gains periodically to them. These include government schemes and debentures, among many other instruments.
In a developing country like India, an investor can never underestimate the power of infrastructure. This investment class, although lacking liquidity, has been an excellent investment opportunity promising decent returns over the years. An attractive alternative to the traditional way of investing in real estate(i.e., buying property) is investing in REITs (Real Estate Investment Trusts). They provide one with the option of investing in real estate at considerably lower capital and ensure liquidity to the investment.
There are many "formulae" available for asset allocation. Still, one must keep in mind that not all investors are the same, nay... no two investors are identical, and what works for one might be disastrous for the other. The only advice we can give is... get more advice!
We'll be back with some more finformation!
Till then, Stay Safe! Invest Safer!
Ans. While the two terms are frequently used interchangeably, the latter is usually used for the divisions within an asset class while the former refers to the division of available capital into various assets.
Ans. A debenture is one of many ways a company borrows money from the market. It is a way to raise capital without offering further equity. These come with fixed interest rates and numerous options for the payout of the accrued interest.