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Is your portfolio apt for you?

Siddhi Sharma
/ Categories: Knowledge, MF
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Is your portfolio apt for you?

Financial planning is a vital aspect of every individual in order to fulfill their long-term as well as short-term goals & objectives. If an individual does not possess the appropriate financial plan, then he might end up with a financial crisis in the future. In order to avoid such instances, an individual should plan his finances and review them frequently. If one wants to earn optimum returns along with lower risk, he should adequately allocate corpus across various asset classes. There are different asset classes like equities, bonds, real estate, cash, and even foreign investments, etc. Asset allocation is the key to portfolio returns and hence, it is of paramount importance.  

The asset allocation decision involves deciding the percentage of investible funds to be placed in stocks, bonds, and cash equivalents. These percentages are decided on the basis of the risk appetite and the goals of the investors. Age is also one of the essential factors. Investors with a higher risk appetite will have a higher proportion of equity and a lower proportion of fixed income instruments and debt. On the other hand, investors with a lower risk appetite will allocate a higher proportion of his portfolio towards debt and a lower proportion towards equity. The basic principle behind age-based asset allocation is that as age increases, risk reduces.  

Mutual funds offer a variety of schemes, where investors can allocate their corpus across various asset classes. Investors with higher risk tolerance can invest a maximum portion of their portfolio towards equity while the remaining towards debt and other instruments in order to have stability in the portfolio & vice versa. Even aggressive investors should have some exposure to debt-related instruments as the aim is to have optimised returns. If the market falls, then the debt portion of the portfolio will act as a cushion and not affect your portfolio adversely. You can rebalance your portfolio as & when required. If equity markets are falling and not delivering returns as per your expectation, then you can allocate a higher proportion towards debt. Same way, as your age increases, you can reduce the exposure of equity and increase the proportion of debt.  

Asset allocation across various life stages of individual:  

Life Stages

Early Career Stage

Middle age and Pre-retirement

Retirement

Risk Appetite

High

Moderate

Low

Risk profile

Aggressive

Moderate

Conservative

Equity exposure

High

Moderate / Low

Low

Debt exposure

Low

Moderate / High

High

Liquid Investment exposure

Low

Moderate / High

High

The above table and graph depict the risk capacity of an individual in relation with his age. These are data are just for representation these are not recommendation as investment and risk appetite of investor varies from individual to individual. After deciding the proportion of the investments vehicles then they can further invest in sub-categories of the same. For instance, if you are investing 65% of portfolio towards equity then you can invest further in sub-categories of equity scheme such as large-cap, mid-cap, small-cap fund, etc. or direct equity.

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