Asset allocation and Risk profile forms most important part of any financial plan. Like we have discussed earlier that we need to first determine our goal and than break it up into logical smaller financial goals by determining the needs based on time scale to achieve them. Next segregated /group our short term (3-5 years), medium term (5-10 years) and long term (10+ years) goals into three different buckets.
Based on time horizon we would first allocate investments in different asset classes after allocating funds for exigency.
While making an asset allocation one's risk profile needs to be taken into considerations. If you are a person with low risk appetite then major allocation should ideally be more towards debt/liquid instruments and higher the risk appetite higher can be allocation to riskier assets/instruments like equities etc. There is no such benchmark as what percentages to should be allocated to each of the instruments as its depended on risk appetite. However thumb rule to do asset allocation is 100 minus age. So far a person of age 25, 75% exposure can be taken into riskier intruments like equities, equity mutual funds etc. and for say a senior citizen risk appetite might be very low thus investments should be in more safer assets.
The simple logic behind the above rule is allocation based on life cycle. Younger a person is age being on his side more funds can be allocated to riskier assets as over long term tas hey tend to exploit power of compouding to give higher returns. But as age goes up risk appetite starts to reduce and thus asset allocation needs to keep pace with age. Hence its important to revisit financial plan at least once a year to see if there is any deviation in goals, tweak asset allocation on need basis. For example if you are approaching towards a particular milestone / financial goals in next 2 -3 years there's need to shift appropiate amounts towards debt/liquid instrument to de-risk any volatility in returns / value.
In my upcoming articles 'll write about different asset classes.
1 comment:
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