What is it?
When you invest, you put some money in equities either through direct equity investment or equity mutual funds (MFs), some in small saving instruments, some in bank fixed deposits (FDs) and some in gold. Spreading your investments across different income- or return-generating instruments is called asset allocation.
Why is it important?
This helps spread your risk, or diversify. If one asset goes down, your entire portfolio doesn’t go down with it. For instance, Rs100 invested in equity would fall to Rs50 if markets fell by half. But if Rs50 was invested in debt (FDs, bonds), which gave 8% return, Rs100 would be Rs79 if equity fell 50%. Diversification also reduces returns. In rising markets, equity returns may get pulled down due to the drag of bonds.
The risk quotient
Every investor can stomach risks to an extent, which differs from person to person. Ascertain how much risk you can take. Your equity allocation, for instance, would be lower if you are a senior citizen, retired and seek a regular income. But if you’re young and salaried and retirement is years away, typically, you would be willing to take additional risk to build a tidy retirement corpus.
What to do?
Direct equity and equity MF investments are the same asset class. If you are a salaried employee, your provident fund and public provident fund accounts will cater for your debt allocation.