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Why investors should consider asset allocation


Importance of asset allocation

Aims to reduce volatility

Due to lack of correlation between returns of different assets, it is difficult to predict market trends. Asset allocation can help to offsets a better performing asset with the impact of a downside faced by another asset. Diversification can help distribute risks across asset classes and try to lessen overexposure to single asset in the portfolio. Thus, investors can get reasonable returns, at a lower risk.

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Notes:
* Allocation between equity and debt assumed to be 50:50
^ Allocation between equity, debt and gold assumed to be 45:45:10
Returns – Average of 10-year CAGR on daily rolling basis from March 31, 2008, to June 16, 2022
Volatility – Standard deviation of 10-year CAGR returns from March 31, 2008, to June 16, 2022
Risk-adjusted returns denoted by Sharpe ratio computed based on portfolio returns and volatility. Risk-free rate of 5.05% used for the analysis, which is the one-year average 91-day T-bill rate for the period ended June 16, 2022
Debt, equity and gold represented by CRISIL Dynamic Gilt Index, Nifty 50 and prices of gold from goldprice.org, respectively Above picture is for illustration purpose only and should not be taken as base for making any investment decision.

Risk profile

Asset allocation is based on the investor’s risk profile.

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For the aforesaid chart, kindly show different colors for more clarity purpose

Instils discipline in investment decisions

Investors are often driven by greed and fear, which forces them to follow the herd, often leading to heavy losses. Under such circumstances, asset allocation enforces financial discipline and offers a balanced exposure to various asset classes, in line with the investor’s risk-return profile.

Asset allocation can generate better inflation-adjusted returns

While investments in fixed income (traditional savings instruments) assure stability, they tend to generate only marginal inflation-adjusted returns. Equities can be an alternative if we need reasonable returns to offset inflation. However, instead of letting equities dominate the kitty, which poses higher risk, it is advisable that investors hold diversified products across asset classes.

Goal-based asset allocation to achieve specific goals

A goal-based approach involves investing to achieve specific goals (small, medium and long term) by allocating money to different asset classes in sync with one’s risk capacity and time horizon.

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Summary

Investors may not have the wherewithal to manage their money and allocate money across asset classes. In that case, investors can seek professional management support to reach their desired financial goal. Investors can also rout their investments through mutual funds.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

An investor education and awareness initiative by SBI Mutual Fund

  • Investors should deal only with registered Mutual Funds, details of which can be verified on the SEBI website (https://www.sebi.gov.in) under ‘Intermediaries/Market Infrastructure Institutions’.
  • Please refer to website of mutual funds for process for completing one-time KYC (Know Your Customer) including process for change in address, phone number, bank details, etc.
  • Investors may lodge complaints on www.scores.gov.in against registered intermediaries if they are unsatisfied with their responses. SCORES facilitates you to lodge your complaint online with SEBI and subsequently view its status.

 

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