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Investment Guide

What is Asset Allocation?

What is Asset Allocation?

The most significant factor that influences your investment outcomes is not market timing or stock selection, it is how you allocate your funds to different assets.

"Don't Put All Your Eggs in One Basket" is a timeless adage that investors have used to make the right investment decisions. When it comes to investments, the different baskets are the various asset classes. Asset classes include equities (stocks), fixed income (bonds), cash equivalents (gold, money market funds), and real estate.

Parking all the funds in a single asset class heightens the chances of risk, as poor performance in that class could significantly impact the portfolio. Instead, if the funds are allocated among various asset classes, it spreads the risk and increases the potential for stable and long-term returns. So, what does asset allocation mean, let’s find out. 

What is Asset Allocation?

Asset allocation is the strategic division of funds across diverse asset classes to earn a risk-balanced return. It helps cushion investors against portfolio volatility, ensuring their money works as hard as they do. 

Need for Asset Allocation

Now that we have addressed what is portfolio allocation, let’s move on to the need for asset allocation. 

During the Global Financial Crisis of 2008, Indian equity markets witnessed sharp declines. Investors with diversified portfolios, containing fixed income and gold allocations saw smaller losses than those fully invested in equities. Asset allocation helps in: 

1. Risk diversification by spreading the risk across various asset classes, reducing the impact of market volatility on portfolios. 

2. Maximising the returns as it captures higher returns during bullish market conditions in certain sectors or assets.

3. Capital Preservation by allocating funds in safer, lower-risk assets like bonds or cash equivalents helps preserve capital during times of market turbulence.

Types of Asset Allocation Strategies

Asset allocation differs based on each investor's age, individual goals, risk tolerance, and financial circumstances. Considering these factors asset allocation strategies are broadly classified into three types :


1. Strategic Asset Allocation: A long-term investment strategy where allocation is pre-fixed between asset classes. Periodic rebalancing is done to maintain this ratio despite market changes. For example, a portfolio with 60% equities and 40% bonds is rebalanced yearly to maintain this ratio, even if equities outperform.

2. Tactical Asset Allocation: A short-term strategy that takes advantage of market conditions where ratios are changed occasionally to maximise returns. An example would be increasing equity exposure from 60% to 70% during a bullish market for higher returns.

3. Dynamic Asset Allocation: A flexible strategy without any fixed allocation ratio. Rebalancing is done frequently to respond to changing market trends, giving it a flexible nature. For example, shifting entirely to safer assets like bonds during a market downturn and increasing equity exposure when conditions improve.


Dynamic asset allocation mutual funds containing a mix of bonds and equities can also be used for Systematic Investment Plans(SIPs). SIPs are a method of investing in mutual funds in which individuals invest a fixed amount of money regularly.


Among the many advantages of SIP investments, one is that they maintain asset allocation by automating investments without manual rebalancing.

Choosing the best strategy is a wholly subjective matter. Allocation strategy depends on the investor's risk profile, risk appetite, and time horizon.

Final thoughts 

Asset allocation is a balanced and strategic investment approach that aligns with investor's financial goals and risk tolerance. In today's volatile markets, diversification of assets can be the key to financial freedom. 

Understanding what is investment allocation is essential for achieving maximized returns. By strategically diversifying funds investors can set a strong foundation for long-term financial success.

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