Saturday, 6 February 2016

5 Ultimate Factors Impacting Your Asset Allocation

Posted by MyInvestmentsPub
Many of us have certain financial goals such as Buying a Home/car, Children Education/Marriage, Taking Vacation, Retirement Planning etc. To achieve these financial goals generally we invest into various investment products over a period of time to create wealth as per our risk profile. Most of the Investors are conservative and do not want to take risk and invest into safe investment products like FDs, Gold etc. because of fearing of losing their hard earned money. Few of us are aggressive and invest into risky asset classes such as Stocks, Mutual funds etc. to generate higher returns. But which one is correct approach for investing? Safe Asset allocation or Risky Asset allocation? what are the factors impact your Asset allocation?



Factors Impacting Your Asset Allocation:


A road map is required your investment portfolio with proper diversification across asset classes. Your Asset  allocation with an investment strategy would help in achieving this road map. Hence it is very important for us to understand what are the factors that would impact our Asset allocation and creating wealth to meet our financial needs. So, what are the factors that would impact or determine your asset allocation?

1. Age:


Age is the top most factor in determining your asset allocation. Your age defines your risk factor in deciding the asset classes to choose. Younger the age higher the risk can take and invest into riskier asset classes like Stocks, Mutual funds. The following table gives you an idea on how much equity and debt ratios should be maintained in your asset classes to be chosen.


On a thumb rule, your equity ration would be equal to 100 - your age. It means, your Risk Taking capability would decrease as your age is increases. It happens because an individual at younger age has more time to recover from bad phase of riskier assets and therefore can afford to take higher risk. So if you have not yet started defining your asset allocation, then you should start immediately.

2. Time Horizon:


I have been mentioning in my previous articles about the importance of Time Horizon in deciding your Asset allocation. Longer Time horizon Higher Risk taking capability. It means, longer the time horizon leads to higher the amount of risk you can afford to take. For example, you want to buy a car in next 3 years. So, your time horizon is 3 years which is less time horizon to achieve your financial goal of buying a car. Hence, you should select safe asset classes like FDs, RDs or Debt funds and should not select Risky asset classes such as Stocks or Equity Funds. Like wise, if your financial goal is Retirement corpus in 30 years i.e. the time horizon is 30 years to achieve your Retirement financial goal, then you can choose Risky Asset classes such as Equity Funds or Stocks to see good yields over a period of time. Longer time horizon leads to increased risk taking capability and higher allocation towards riskier assets classes.

3. Risk Appetite:

Your Risk appetite or Willingness to take Risk would define the amount of returns you can expect from your Asset allocations. Higher the Risk Higher the Returns. Means, if you are willing to take risk, then you can look to have high asset allocation towards high return generating asset classes such as Stocks or Equity Mutual funds. It always important to define your Risk appetite first and then determine the asset classes for defining your Asset allocation.

4. Income:

An Individual who is in higher Income bracket can obviously tolerate higher risks. As he is earning more can have more Investible amount, hence can invest more in riskier assets. The income here is not only the salary but also included his assets and liabilities. If your Annual growth rate in Income is high, your Risk Taking capability is more and can opt for Riskier asset classes in his or her asset allocations.

5. Dependents:


One more important deciding factor in Asset allocation is number of dependents in your family. Higher the number of dependents lower the Risk Taking capability. If you are unmarried and no dependents, then you can opt for aggressive asset allocation as he need not be too much worried about it as he has the capacity to absorb the losses and can recover during the course of time  from his asset allocation. If you are married and have children, then you asset allocation should be in such a way to give him sufficient returns to achieve his family's financial goals with a balanced asset allocation. He cannot opt for too much aggressive portfolio as he needs preservation of capital for meeting his dependents' financial goals.

Tips to Remember in Doing Asset Allocation:



  1. Early Invest is the best approach to take the benefit of long term horizon.
  2. Diversify your Assets to average the overall investment risk in your portfolio
  3. Invest systematically for longer periods
  4. Regular monitoring on your Investment portfolio and shuffle if needed
  5. Change your life style based on your expenses and try to reduce the unnecessary and expensive loans.

Conclusion:

Asset allocation is one of the crucial step in preparing your portfolio. You need to remember the factors that would affect your Asset allocation before preparing your Investment portfolio. 

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