Let's take a look at some of the asset allocation strategies!

Shruti Dahiwal
/ Categories: Knowledge
Let's take a look at some of the asset allocation strategies! 458 0

Asset allocation is a crucial step while designing a portfolio as it is one of the most deciding factors that help an investor in achieving his goals. Moreover, it signifies the amount of risk an investor is ready to take. Therefore, it is important to create a suitable mix between the asset classes that take into account the investor’s risk appetite and his investment objectives. Let’s take a look at some of the asset allocation strategies below: 

Strategic asset allocation- 

This is a need-based long-term portfolio strategy, which is built by taking into account the risk appetite, time horizon available, and the goals of an investor. Here, the focus is on incorporating a buy & hold strategy to make long-term gains. In this strategy, allocation to the asset classes is fixed. Periodic rebalancing is done to align the proportion of the assets with the original allocation plan. This strategy is less activity-oriented than tactical asset allocation. 

Example- 

A risk-averse investor may allocate 70 per cent of his funds to debt and the remaining 30 per cent to equity. However, after a year, equity may be seen performing well and now accounts for 45 per cent of the portfolio. The investor is not comfortable with the increased exposure to equity. So, he will either sell 15 per cent of his equity or invest additional funds in debt to bring the portfolio back to its original proportion. 

Tactical asset allocation- 

This is a view-based where the investor tries to time the market. The primary aim is to take advantage of the market situation and create additional wealth. This is done by allocating more funds to the asset class, which is expected to do well in the near term. This strategy is more activity-oriented as compared to strategic asset allocation. 

Example- 

In a bull market cycle, when the equity market is expected to do well, a fund manager will allocate higher funds to equity investments. Or, in a bear market cycle, higher allocation to fixed income instruments will be done to reduce losses. Similarly, when inflation levels are expected to rise, allocation to commodities can be increased. 

Dynamic asset allocation- 

Decisions taken in tactical asset allocation may not always give the desired results. Owing to this, the portfolio may come under stress or incur losses. In this situation, a dynamic asset allocation strategy comes into the picture. In this strategy, mechanical rebalancing is done in asset classes to reduce exposure to loss-causing asset classes and increase exposure to the profitable asset classes. In the event of an asset class going beyond its prescribed limits, a portfolio rebalancing would be done under this strategy.

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