Allocation of Funds
In nature, beneficial compounds like table salt are frequently produced by mixing potentially volatile compounds like sodium and chloride in a certain ratio. Similarly, putting together an investment portfolio with the right risk-reward ratio requires mixing numerous potentially volatile individual investments, such as equity, gold, debt, and so on, into a specified proportion. Investors, on the other hand, frequently struggle to find the golden formula that blends these disparate individual investments into an ideal portfolio.
Various asset allocation strategies have been created to find the right blend of varied investments that optimize risk and return in an investment portfolio. We’ll walk you through essential aspects of the asset allocation process in this blog. This will help you build an investment portfolio that strikes the right mix of risk and return.
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What is asset allocation?
Asset allocation is the practice of investing across diversified asset classes, to put it simply. The following are the two most critical components of this definition.
Because the goal is to consistently balance risk and return in an investor’s portfolio, asset allocation is a process. The purpose of this method is to improve the portfolio’s risk-adjusted return, i.e., to increase return without increasing portfolio risk or to keep the same level of return while lowering total portfolio risk. Investing is done in a variety of asset classes: The term “diversified” in the context of asset allocation refers to investments that are not connected in terms of performance.
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Asset Allocation Strategies of Various Types
There are two types of asset allocation strategies: strategic asset allocation and tactical asset allocation.
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Allocation of Tactical Assets
Nowadays, a tactical asset allocation strategy often entails using financial models to actively raise or decrease allocation to specific asset classes to profit from shifting market or economic conditions. By investing in Dynamic Asset Allocation Funds, also known as Balanced Advantage Funds, you can benefit from tactical asset allocation. These funds use models to adjust their portfolio exposure to equity, debt, and cash in response to changing market conditions, allowing investors to achieve the maximum favorable possible risk-reward ratio.
Tactical asset allocation models are less automated than strategic asset allocation models, and you can tailor them to your investment objectives. The age-based asset allocation method is the less complicated of the two strategic asset allocation methods. The age-based asset allocation technique bases investing decisions on the investor’s age using these principles
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Asset Allocation Based on Risk Profiles
This method of strategic asset allocation is a considerable advance over the age-based strategy because it considers the investor’s risk tolerance when evaluating how investments should be distributed across various asset categories.
If you know which of my article got printed in Economic Times. Do read this article – My first article in economic times.
From Hemant K Midha