Investing Wisely: How Asset Allocation Helps Secure Your Financial Future

For 55-year-old Pankaj Jaiswal, real estate had been the preferred arena of investment for as long as he could remember. Before him, his father had also invested heavily in real estate and realised handsome returns and Pankaj was happy to continue with the trend. However, in the post-COVID scenario, the price of real estate in his city had stagnated, with fewer purchases being carried out and Pankaj found himself holding a portfolio filled with comparatively illiquid assets. 

At this time, Pankaj’s son Kunal had just completed his MBA in Finance and was keen on augmenting his family’s portfolio in a sustainable manner. That is when the two began discussing the importance of concepts such as asset allocation and optimal diversification, in the construction of a portfolio which would be able to withstand sectoral shocks and offer stable returns over the long term.

Importance Of Asset Allocation

Asset allocation is a fundamental investment strategy that involves spreading one's investments across various asset classes such as stocks, bonds, commodities, real estate, and cash, with the goal of achieving a balance between risk and reward. 

This strategy is based on the principle that different types of assets have varying levels of risk and return potential. The allocation of assets within a portfolio is typically determined based on an individual's financial goals, risk tolerance, and investment horizon.

The primary objective of asset allocation is to reduce the overall risk associated with an investment portfolio while optimising returns. By diversifying across different asset classes, investors aim to protect their investments from the potential downturns in any single asset category. 

For example, Pankaj’s portfolio would be able to generate consistent returns from equity, debt and commodities, if he had considered diversifying away from real estate, even during situations wherein the real estate sector was unable to offer any returns.

Asset allocation is a dynamic process, and it may require periodic adjustments as and when the investor's circumstances and financial goals change. A well-structured asset allocation strategy can help individuals achieve long-term financial objectives and manage risk effectively, making it a crucial component of sound financial planning and investment management.

Consider Multi-asset Allocation Funds

Given that a large chunk of the family’s wealth was tied up in illiquid real estate, Kunal suggested that they consider investing in multi-asset funds, as these mutual fund schemes would offer them the benefits of asset allocation and diversification through a singular route. In time, this investment would grow large enough to offer stable returns and ensure optimal diversification. Further, the family also planned to liquidate some of their properties, during conducive market conditions, and channel those funds to multi-asset schemes.

In simple terms, multi-asset allocation funds are mutual fund schemes which undertake capital allocation across a mix of asset classes, such as equities, debt and commodities. These schemes are required to invest at least 10% of the corpus across a minimum of three asset classes, thereby ensuring that your investment is diversified effectively, even as you invest through a single channel.

Benefits You Can Harness

Multi-asset allocation funds offer investors like Pankaj a bevy of benefits, starting with the fact that they can capitalise on diversification without needing to invest in multiple assets personally. Secondly, multi-asset funds are managed by professional fund managers, who allocate investments by considering market conditions, economic forecasts, rendering them a compelling choice for the present investment environment. This means that you can enjoy the benefits of professional fund management, at minimal cost.

Thirdly, these schemes have a flexible management strategy, and thereby, permit fund managers to take asset allocation decisions focused on offering you consistent returns even in the most fraught markets. 

For instance, in situations such as the recent sell-off in the equity markets, these fund managers have the ability to shift the capital to the asset class they find attractive, thereby limiting your downside. Additionally, your portfolio will also be able to capitalise on the potential returns offered by different asset classes, in evolving markets.

To conclude, asset allocation acts as the cornerstone of an optimised portfolio and with multi-asset funds, you can enjoy effective diversification effortlessly, making it an excellent choice for a variety of investment requirement