Why Asset Allocation Is So Important in an Investment

If you have been tracking the Indian stock market for a while, you would understand just how topsy-turvy it can get. It is absolutely critical to monitor and notice the rising and falling trends in the stock market. The surge can be the highest thing for a while and before you know it – it could be completely down. Many of the investors were thrilled one day and dejected as can be the next, with a common thought – where did I go wrong?

The no brainer is that equity investment is a key factor in every portfolio. You would never find a portfolio that does not have a fair bit of investment in the stock market. Everyone wants to invest here because of past success stories and it is only when there is a crash that people back off. So, the best idea would be to follow the theory of asset allocation when you are investing in the stock market. How does this work?

1. It is as simple as planning to have diversity in your investments. The moment you have clarity in where you are investing – this works. The need to have a portfolio where you have divided the investment into not only companies, but sectors and even market capital. What this does is that your investment objective is also split across different risk appetites. When you have this split equivalently, your risks are also split proportionately.

2. So, if you were to invest in a sector that depends heavily on the farmer market and there is a drought that year, you could have been a heavy loss – but if you have split your investment into an IT firm that is growing well you have cut your loss immediately. The whole idea is to reduce the volatility in the market by investing in different sources.

3. At the same time, asset allocation means putting money in the same sector across different market cap segments. This means you can invest in a small IT firm and even an MNC at the same time – looking at the growth in the sector and not at the company alone. There would be benefits of putting money in a blue chip, but the returns and risk are possibly higher when you invest in a smaller firm.

It is also important to track and understand our returns with different aspects, the simplest way to answer this is by asking yourself – why do you want to invest? It could be for a wedding, your retirement or child's education. The importance of this is with the kind of timelines you are working with. When you have this planned out, you have to follow a specific time period. It could even make sense to split your investment across different channels too – like equity, mutual funds and even bonds. If you are looking at a child's marriage in the next 15 years, it does make better sense to invest in a longer term instrument.

To create an asset plan, you need one of the best wealth management experts. They would be able to guide you best based on your requirements and goals. This apart, they would know your appetite for risk and how far you are willing to go to make that profit. Each person has a different risk factor and appetite and it is senseless to have a common plan for all. You need to analyze your requirements and then plan out the best kind of allocation in terms of investment. The right wealth management solutions need to be coupled with constant inputs and growth points – analysis of each growing sector and this can be done by experts only.

If you have been thinking of investing in the stock market – there would not be a better time. There is plenty of growth points at the moment and you should only be looking at a diversified portfolio. Look at having the best wealth managers by your side to guide you towards making and reaching your profit goals. In the end, having a strong portfolio is quite a tough task, so put your mind into it and go as deep as possible in to a company's financials before taking a call of investing in them.

Source (opens in a new tab) by Sneha Thakur (opens in a new tab)