If you have an opportunity to make your own team in IPL, what will you do? Take all the best batsman or make a team of all types of bowlers or make a good mix of batman’s, bowlers and fielders. To win a match it is important to have good mix of players with different skill sets. Similarly, in your portfolio you need all kind of asset classes, which will perform in different market conditions. A good team mix can be a mantra for winning a match and asset allocation can be a mantra for a winning portfolio.
What is asset allocation?
Asset allocation is the mix of different asset classes e.g. equity, debt, gold etc. in an investment portfolio. The aim of asset allocation is to balance risk and returns in accordance with different financial goals and risk appetites. Unfortunately, asset allocation is not given its due importance by many investors in India and we see investment portfolios heavily skewed towards particular asset classes without factoring in risk and return consideration.
Let us take an example to show market value (at the end of 2019) of Rs 1 lakh investment made in 1998 for different asset allocations with annual asset allocation rebalancing to the target asset mix. The maximum wealth creation has taken place in 70% equity and 30% debt asset mix.
This analysis has several important lessons for investors:
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