Friday, April 5, 2013

Why asset allocation is important

Everyone understands investing the money is really important. If not, understand that investing is expected to give more returns than inflation. On the other hand, saving money would give depreciating returns compared to inflation.

Primarily, investing everything in one asset class (debt, equity, gold, real estate,  liquid funds, cash etc.,) is a bad idea. Based on your current age, the asset allocation should be done. Most of them are over-exposed in real estate.

The rule of thumb is to reduce the exposure on risky investments (equity, mutual funds, ULIP etc.,) and increase the exposure on safe investments (PPF, PF, debt, gold etc.,) as your age increases. Also, the amount in each asset class should be less than 70% ideally.

There needs to be some emergency cash always available for unforeseen emergency need. This would be typically around six months of your expenses.

The primary reason for asset allocation is to diversify and thereby reduce the risk of losing the entire investment because of one asset.  For example, if one invests only in real estate and for some reason its down, he would lose his entire wealth. On the other hand, consider a person investing in different asset classes. He invests in equity, real estate and debt according to his age. Even if one asset class is down, the others would assist him in getting returns.

What do you think? have you invested in different asset classes.  Are you over exposed to any particular asset class?
Share your comments.

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