The importance of the asset allocation process
Every investor has their own risk appetite along with independent financial needs. So, what asset
allocation does is, it ensures that your investment portfolio is perfectly aligned with your financial needs
and risk-taking ability. We will understand the importance of this process through a proper example.The
top-performing mutual funds in India are great for leading a good quality of life. Therefore investors
should invest in them from early on. When they get close to their retirement time, these funds will hugely
benefit them. Today, retirement can be a hassle-based time. So, experts suggest that investors engage in
retirement planning from a younger age.Advance planning always helps an investor. When young,
investors can spend a lot of time contemplating the right investment scheme for them and plan for the
future. With advanced planning, they can improve their lives or handle financial matters easily later in
life. So, because of these reasons, it is recommended that people begin investing from a younger age.
Let's consider that you have Rs 20 lakhs for investment purposes. You require Rs 10 lakh within 3 years
for making the down payment for one property investment. So, in this case, there can be 2 possible
scenarios. We will have a good look at them below.
1st scenario – You invest fully in equity. As a result, you receive a 15% return in the first year itself. But
then, you witness a 30% downfall in the second year and your investment falls in value to a surprisingly
Rs 16 lakhs. You will require a minimum amount of Rs 10 lakh for the above purpose, next year.
Therefore, you can't take this risk and thus redeem Rs 10 lakh. The balance amount will stay invested in
equity. If we assume you get 15% CGAR returns from the 3rd
year onwards, then your portfolio value
would be 9.3lakhs after five years.
2nd scenario - Let's suppose you have invested Rs 12 lakhs and Rs 8 lakhs in equity and debt,
respectively. We will assume that debt gives 8% annualized returns in three years. Just like the 1st
scenario, equity falls sharply by 30% in the 2nd year and from the 3rdyear, you receive 15% CGARreturns.
The conclusion from these two scenarios
The ultimate result after 5 years is quite good, as the figures went up to 14.8 lakhs after 5 years. This is
starkly different when compared to the previous situation. Therefore, it is clear that the second scenario is
a better one as the results are on the higher side for this. Asset allocation protected the portfolio from
different market risks.
It provided liquidity for your down payment to purchase the property. The equity, on the other hand, gave
you long-term capital appreciation. This is why asset allocation is so important. We at recommend our
customers the same as we believe this process has the potential to save their portfolio from the harmful
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