“If you do not know how to care for money, money will always stay away from you”. This dictum is applicable to one and all.  So if you want the money, learn to take care of it. Efficient use and management of money has always been a challenge for people, especially for the middle to senior level professionals who are so busy making it.
The one question that bothers all  money makers and savers is where to invest the savings. The plethora of  information on investment options only adds to the confusion.
A simple answer to this dilemma is to practise asset allocation.
Asset allocation, in simple  words,  is to follow a strategy that helps an investor to allocate his / her monies in various assets based on  the risk he/she is willing to take, his/her financial goals, and the time stretch that he/she can let the money be invested.
The cardinal rule of the  financial markets  is : ‘ Higher the risk, higher the rewards.’ Allocation to various volatile classes such as equity, real estate, gold and commodities may result in high gains or losses depending upon fluctuations in  these markets. At the same time, fixed income investments may not even be able to  offset the inflationary pressures, especially in developing economies like India.
Therefore, the selection of assets in one’s investment portfolio has to be done carefully  after considering one’s risk appetite and one’s financial requirements over a period of time.
Asset allocation shall begin with providing a starting point for investing into the following broad and typical assets:
•  Stocks / Equities / Exchange Traded Funds
•  Fixed income instruments like Time Deposits (Bank deposits), Bonds, Managed instruments like Mutual Funds
•  Cash or Equivalent to take care of the liquidity requirement
•  Gold and other alternatives
•  Real Estate in the form of land, flat, commercial property etc.
The underlying premise of asset allocation is that the asset classes shall perform differently in a given economic environment. Asset allocation will therefore mean that the portfolio of investments shall balance the risks associated with various asset classes and shall deliver returns to the investor,which are  a  blended net from all  the assets, and therefore, less volatile in nature.

Sample Asset Allocation

Asset allocation can generally follow two different models:
Strategic Asset Allocation – To create and maintain the asset allocation which will provide returns on investments over a fairly long term for a given degree of risk. The overall allocation to  an asset class does not and should not change once the degree of risk and return expectation has been defined. This investment strategy is generally considered to be of a passive nature.
Tactical Asset Allocation – Here, an investor adopts a more active approach and tries to shuffle his position into assets that provide the most potential gains and returns.
To make life simple for investors, there are a lot of funds available in the market which resort to asset allocation. These are the typical balanced funds,  the Fund of Funds and so on.
Asset allocation however, fails to work where investors do change their allocation owing to
1.    Performance of their investment portfolio :  Some short-term returns may force investor to look at higher risks. Similarly, a period of less returns may force the investor to decrease the risk on the portfolio and finally the investor decides to change the strategic allocation to assets.
2.    Investor’s risk appetite may not be fully discovered while allocating the funds. The investor is not aware of his  risk-taking capability while deciding the investments.
3.    The stocks, bonds or  other investment vehicles  in an asset class may not perform in line with the broad asset category. For e.g. a  mutual fund may underperform against the benchmark index.
4.    There may be a short term  aberration in the performance of an asset class as compared to its long term returns. This is very evident in  the case of equities which have generally delivered long-term returns as compared to their short-term performance. 
To summarize, an asset allocation model works well for those investors who can identify their financial requirements very well, understand the underlying degree of risk for their investments and are  comfortable with the blended yield of these investments.


Views expressed and claims made in the articles on this site are the contributors' own, and nrizone does not necessarily agree with them, or endorse them, in any way.
Contributions are published in good faith, with due diligence, and liabilities for authenticity or copyright lie with the authors.

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