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Business News/ Money / Personal Finance/  Starting to invest? Find out the right mix of assets in your portfolio

Starting to invest? Find out the right mix of assets in your portfolio

Investors are advised to invest a high proportion of portfolio to equity at a young age, and then bring it down as the age advances

 It is vital to carry out portfolio readjustment from time to time Premium
It is vital to carry out portfolio readjustment from time to time

Those who firmly believe in the magic of compounding are conscious of the fact that the sooner you kick off your investment journey, the larger is the wealth you stand to accumulate at a later age.

And to make this happen investors should allocate — advise wealth advisors — a higher proportion to equity and a smaller portion to debt at a young age, and gradually reverse the allocation with advancing age.

Here we give a lowdown on the right allocation between different asset categories: equity, debt, gold and cryptocurrencies. But before we begin, let us understand that there is no ‘right’ in the true sense of the word and what proportion you opt for which asset class is an independent decision that would eventually reflect in your wealth creation. It depends on an interplay of factors such as the investor's age, risk appetite and expertise in financial markets.

“It is an old rule that says that you should invest more in equity when you are young and less in debt. But if you are an extremely conservative investor then you would refrain from risking too much in equity regardless of the age. So, it is not fair to say that everyone should follow the same rule. That would be similar to fitting the square peg in a round hole," says Deepak Aggarwal, a Delhi based chartered accountant and financial advisor.

Tilt to equity

One of the most common rules says that the proportion of equity should be 100 minus your age, while the remaining proportion needs to be invested in debt, safe havens such as gold and other alternative investments such as cryptocurrencies.

For example, if an investor’s age is 25, then 100-25 i.e., 75 percent can be the optimum allocation to equity for her.

When she invests 75 percent of her portfolio in equity assets, the remaining 25 percent of the portfolio’s value can be divided among other asset classes such as gold, debt and cryptos.

Suppose, she invests 15 percent of the total portfolio’s value in debt instruments such as corporate bonds and fixed deposits (FDs), the remaining 10 (25-15) percent can then be invested in gold and cryptos, say 5 percent in each.

Let us take another example.

Let us suppose there is an investor Meera who is 35-year-old. She is expected to invest 65 (100-35) percent of portfolio in equity assets. The remaining portion of the portfolio i.e., 35 percent should be invested in debt, gold and cryptos.

Now, she invests one-third of the balance portfolio in each of the three categories then she would invest anywhere between 11 to 12 percent of the portfolio in each of these asset classes: gold, debt and cryptos.

Rebalance the portfolio

Investors are also advised to rebalance their portfolios when the allocation changes because of market fluctuations. In the current scenario when markets are on a bull run — investors’ allocation to equity has risen significantly, thus necessitating the need to rebalance the portfolio.

"Given the current market levels, instead of focusing on profit booking, one can relook their overall portfolio construct and rebalance their portfolio based on their risk profiles," said Vaibhav Porwal, Co-founder, Dezerv.

Besides age, another factor that determines the right allocation of assets is risk appetite. When an investor’s risk appetite is low then the allocation to equity should be low or moderate, and investment in debt instruments should be high.

To sum up, one can increase or decrease one’s allocation to different asset classes based on the age and risk appetite, and it is equally imperative to rebalance the portfolio from time to time.



We explain rebalancing of portfolio here.
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We explain rebalancing of portfolio here.

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Published: 17 Aug 2023, 09:36 AM IST
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