Achieve Your Dreams through Goal-Based Asset Allocation

Have you determined your financial goals? Are you thinking about what you should do next to achieve these goals? The answer is asset allocation. Every asset serves a different purpose in an investment portfolio. Asset allocation refers to determining the appropriate proportion of assets to add to an investment portfolio. It is crucial to get the right balance.

How To Allocate Assets for Achieving Financial Goals?

To strike the right balance between different assets, you need to understand the primary features of different asset classes. For instance,

• Equities are super volatile in the short run but offer higher returns than other asset classes when kept invested for the long term.

• On the other hand, debt instruments are usually low-risk investments that offer a fixed interest rate for a certain period.

• Commodities like gold are excellent for hedging stock market risk, as gold prices increase when stock prices go south.

Similarly, every asset class comes with their pros and cons. For allocating assets in your investment portfolio to achieve financial goals, you need to align the asset class with your goal. For instance, let’s talk about the asset allocation for some of the common financial goals. Read our blog How Asset Allocation Boosts Investment Success to know more.

Saving Up for Retirement

Planning retirement is important for everyone and in India, many of us save and invest money to have a peaceful and financially secure life after retirement. To achieve the desired retirement corpus, you need to allocate investment funds into assets according to your age. Read our blog Mastering Your Finances: The 50/30/20 Rule for Balancing Needs, Wants, and Savings to gain more insights.  One of the basic thumb rules of asset allocation is “100 minus your current age”, and the number you get should be the equity proportion in your investment portfolio. If you go by this thumb rule and you are 25, then you can invest 75% of your investment funds into equity and the remaining 25% into debt and other assets. Equity will help your investments grow, and since you usually have around 35 years in hand to retire, that is ample time for your equity investments to grow. Also read our blog How to diversify your mutual fund portfolio?. However, this ratio of equity, debt, and other assets would change if you start planning your retirement in your 40s. Then you have to bring down the equity portion to around 50-60 per cent and keep the remaining into fixed income assets to balance the risk.

Buying A House in The Next Ten Years

For this goal, you can go for a higher portion of the equity in your portfolio as you have time in hand. If you can take higher risk, you can keep 80% of equities in your portfolio to get a higher return and remainder in debt to stabilise the portfolio. However, you can reduce the equity allocation as you inch closer to your target amount.

Going For A Foreign Vacation In The Next Two Years

This is a short-term financial goal for which you should invest in risk-free or low-risk assets, as your time horizon is only two years. You can invest 10-15 per cent in equity to generate higher returns. However, in two years, the market can go down, and equities may not generate any return. Thus, you need to invest in debt mutual funds and other debt instruments which offer stable returns so that you can comfortably accumulate the fund that you need for your travel in the next two years.

Child’s Higher Education and Marriage

If you are planning for your child’s higher education or marriage, you can go for a higher equity proportion if your child is young. For instance, if your kid is now ten years old and you are planning for his higher education after 10-12 years, then you can go for a higher equity portfolio and invest a certain percentage in debt investments. For an investment tenure of 10 to 12 years, a 70:30 ratio of equity to debt can be a good starting point.

What Do You Need to Consider for Asset Allocation?

Although financial goals are the main consideration when it comes to selecting the appropriate combination of assets for your investment portfolio, there are other factors to consider as well. It would help if you also considered the following:

• Risk profile: Risk-takers can invest a higher portion in equities, while risk-averse investors can go for a debt heavy portfolio to play safe and fair.

• Investment tenure: You need to consider not only the age but the investment tenure. If you are planning for retirement at 40 and your current age is 25, you may need to increase the portion of the equity in your portfolio to achieve the desired corpus in the next 15 years. Read our blog Types Of Mutual Funds You Should Know to know more insights.

Thus, mixing the right assets is crucial for your investment’s success so it is important to allocate the assets wisely.