5 Things to Know About Asset Allocation in Mutual Funds
17 Apr 2017
Nutan Gupta
New Page 1
Asset allocation is putting your money across different asset classes -
stocks, bonds, real estate, cash and commodities. Asset allocation ensures that you get
the best returns out of your savings. Here are five things that an individual must know
about asset allocation.
Asset allocation is not diversification
A lot of times people use the words asset allocation and
diversification interchangeably. However, one needs to understand that these are two
different terms. Asset allocation is the process of deciding the amount of exposure one
needs to have in different asset classes. On the other hand, diversification is what you
invest within these asset classes.
Asset allocation could be tactical
An investment strategy is planned to achieve long-term goals. A mutual
fund invests in stocks which the fund manager believes will give higher returns in the
future. Sometimes, a fund manager thinks that a particular fund will give good returns in
the short-term but also has the potential to give superior returns in the long-term.
Investment moves are based on what the fund manager thinks and this is known as tactical
approach.
Asset allocation is not standard
Asset allocation differs based on the age and risk appetite of an
investor. An individual who plans to retire next year will have a different asset
allocation than a person who is a young entrepreneur. Asset allocation also differs
depending upon the income stream of an individual. An individual with a fixed and regular
income stream can have a more aggressive asset allocation than a person whose income is
not regular.
Asset allocation could be dynamic
A dynamic asset allocation model is the one when a fund manager makes
changes in the portfolio which reflects the most recent changes. These changes should be
made keeping the long-term performance of the asset in mind. The riskiness of assets
change with time.
Asset allocation needs periodic rebalancing
The asset allocations in our portfolio fluctuate every year depending
on market fluctuations. Some assets may have performed extremely well in one year, while
some may have underperformed in that period. Periodic rebalancing is required as it
reduces volatility in the portfolio.