What is the Significance of Asset Allocation for Investors?

Posted On Friday, Nov 09, 2012

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The world that we live in today, makes no promises. Things change in the fraction of a second and before you would even get a slightest of the hint, the world that you have been residing in would change, either for good, or for the worst. And in case, you are the one to be blamed or appreciated for. People, today, have understood the importance of planning things, or sorting things, right from the beginning, so that in the hour of need, they would not have to run helter skelter, for that tiny bit of hope. They would rather make themselves safe and sound when the time is in their favour and when the bad times hit, they would be all prepared to take it down.


In all, that is, the planning for all of it, starts with proper asset allocation. Now in simple layman terms, asset allocation is investing whatever amount that you can, in proper sectors and fields, so as to make sure that you get proper returns in the future. Before you make any major decision, there are numerous things that you need to check out,. As an investor, you need to make sure that you properly allocate your hard earned money in these different asset classes in order to fulfill your investment objective.


When it comes to mutual funds, asset allocation depends on the below mentioned factors:


Age Bracket

What age you belong in, determines what your plans should really look like. Young people who have a constant income of money, can always afford to invest more in equity funds, because given the fact that they have a constant inflow of money, they could afford to take risk and aim to generate higher returns. After all, it is when you are young that you make mistakes and progress and learn from both. At the same time, if you are retired or close to retirement, choose debit funds, as they are less risky and aim to give moderate returns.


Risk Factor

It basically pertains to how much are you ready to risk or how big of a heart you have got. The more you are ready to risk, better you go for equity mutual funds.


Investment Horizon

This is for what time period you want to invest your money. If it’s around a year or less, go for debit mutual funds. If you have a long term horizon, then you could definitely go for equity. In an ideal scenario we at Quantum Mutual Fund always insist our investor to park their money for a long term. The investment horizon of an investor also depends up on the investment objective of the investor, if Mr. A wants to invest in mutual fund for his daughter's marriage that will tentatively happen in next 3 years then the investment horizon for Mr. A's investment is 3 years. Choosing amongst small, mid or large cap companies
When industry scenario is difficult, the resource strengths of large cap stocks help them survive; many mid-cap / small cap companies fall by the way side during economic turmoil, because they lack the resources to survive. It can therefore be risky to invest in mid-cap / small cap funds during periods of economic turmoil.


As the economy recovers, and investors start investing in the market, the valuations in front-line stocks turn expensive. At this stage, the mid-cap / small cap funds offer attractive investment opportunities.


Over a long period of time, some of the mid-cap and small-cap companies will become large companies, whose stocks get rerated in the market. The healthy returns on such stocks can boost the returns on mid-cap and small-cap portfolios.


As far as asset allocation is concerned, it is done in three major forms, namely, stocks, bonds and cash.


Stocks

Stock mutual funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography:


Size is determined by a company's market capitalization, while the investment style, reflected in the fund's stock holdings, is also used to categorize equity mutual funds.


A stock fund may be sub-classified along two dimensions: (1) market capitalization and (2) investment style (i.e., growth vs. blend/core vs. value). The two dimensions are often displayed in a grid known as a "style box."

Market capitalization or market cap indicates the size of the companies in which a fund invests, based on the value of the company's stock. Each company's market capitalization equals the number of shares outstanding times the market price of the stock. Market capitalizations are typically divided into the following categories:


• Small cap
• Mid cap
• Large cap

They are risky, but come up with excellent returns. It depends a lot on the market conditions. If you are ready to take a leap of faith to invest in something for a huge return, this is it for you.


Bonds

Debt funds by nature, Bond funds are relatively less risky by nature. They are meant especially for investors with relatively less appetite for risk and having an intention to earn returns higher than what are possible to earn from other avenues like Fixed Deposits that are considered as safe. Most bond funds pay income regularly and their NAVs tend to fluctuate less than an equity fund. They primarily invest in primarily of corporate, municipal or government bonds.


Cash

It pertains to all of the cash and cash equivalents. Bank deposits, fixed deposits, properties like houses and real estates, precious metals, gold, jewelry, etc. comes under this category. There are less chances of losing money, but at the same time depreciation of the asset due to inflation is also possible.


The above mentioned things are those that you should keep in mind, while you are planning on asset allocation. Make sure that you make yourself aware about all of the things mentioned above, and only then come to a specific decision, because it is something on which the wellbeing of your future depends on. Be wise, make your decisions only once you are sure about making it.



Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article constitute only the opinions and do not constitute any guidelines and recommendation on any course of action to be followed by the reader. The views are meant for general reading purpose only and are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the readers. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. Recipients of this information should rely on information/data arising out of their own investigations. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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