What is asset allocation in investment?




A step-by-step plan and a thorough strategy is the key to achieving any goal in life, this is true for investing too. Asset allocation is an investing technique that manages risk and returns by allocating assets in a portfolio based on a person’s objectives, risk appetite, and economic trends.


Traders can use various portfolio distributions to achieve different goals. For instance, individuals preparing for retirement—which might be years in the making—often invest the bulk of their retirement account (IRA) in equities since they have plenty of opportunities to ride out the industry’s short-term volatility.


On Kuvera , you can access the statistics and portfolios of companies concerning their asset allocations every year. In this article, we will be discussing in detail the process and different methods of asset allocation.


Types of Asset Allocation


Asset allocation is possible through several methods; some of the most preferred types are:


  • Dynamic asset allocation fund


Dynamic asset allocation funds or resources, also known as balanced benefit funds, are proactively maintained and engage in a combination of credit and stock, based on market fluctuations.


Based on their perspective of the stock exchange, investors increase or reduce their exposure to stocks and borrowing. These funds use an investment mechanism that enables them to change the balance of debt and equity financing components based on market, economic, and political conditions to help limit risk.



  • Tactical asset allocation


Tactical asset allocation (TAA) is an investing strategy that systematically balances and adjusts the three basic types of assets: equities, treasuries, and money.


TAA’s primary purpose is to maximize portfolio returns while minimizing potential losses. Other trading tactics, like tactical and structural analysis, differ from the TAA investing approach. Instead, it prioritizes asset allocation among mutual funds and only then focuses on investment classification.


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  • Strategic asset allocation


A strategic asset allocation is an investment approach in which the trader establishes desired ratios for different investment categories and restores the portfolio regularly. A planned asset deployment plan is similar to a buy-and-hold method in that it emphasises variety to reduce risk and enhance profits.



  • Multi-asset allocation fund


Multi-asset allocation funds are fusion plans in which investors must invest at least 10% of the principal amount in at least three asset categories. These portfolios often include a mix of equities, loans, and other asset types such as gold, property investment, or capital.
It usually includes more than one asset type and aims to build a range of investments. Individual investors have different asset allocation strategies and asset mix preferences.



  • Age-based asset allocation


The investing choice in age-based asset distribution is determined by the maturity level of the clients. As a result, most monetary planners advise individuals to base their equity investing decision on subtracting their age from a reference level of 100. For example, if you are 40 years old then 60% of your investment portfolio shall be held in stocks.



  • National Pension System (NPS)


The National Pension System or the NPS Asset Allocation has become a popular option for investors looking to safeguard their financial security after retirement. Although the scheme appeals mainly due to up to 10% tax deductions on basic salary as provided by Section 80 to Section 80 CCE, Income Tax Act, 1961, it is also popular due to the freedom it gives in the way you invest your money.



  • Asset Allocation Calculator


Asset allocation calculator is a tool designed to help you understand investment returns and the risk involved by analyzing your current life occupancy. It considers the risk you can bear, your investment horizon, and the distribution of assets to maximize your profit and reduce the risk/loss possibilities.



Watch the YouTube video above by HDFC mutual fund to learn more about asset allocation in investment.


Interested in how we think about the markets?

Read more: Zen And The Art Of Investing


Watch here: All about multi cap funds with Rahul Singh CIO – equities, Tata Asset Management

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