Asset allocation is the process of allocating your investments in different asset classes like equity, debt, real estate, bullions, and so on. It is not enough to just invest your money, but doing it according to proper asset allocation is also important. The primary objective of asset allocation is risk management by diversifying one’s portfolio into different asset classes. It also helps in enhancing returns, managing volatility and liquidity in the portfolio. Broadly, financial planners recommend multiple asset classes so that if one asset falls, another or few others don’t fall as much. In fact, some may as well go up, and that helps your overall portfolio.
Asset allocation is not a fixed proportion or ratio that works for each investor. It differs based on the profile of each investor—income level, risk appetite, needs, goals, returns expectations, time horizon, tax implication, and so on. The objective of a well thought out asset allocation is to build a portfolio that closely matches your future return expectation, while keeping in mind the risk or volatility that you can bear. You should know that not only is asset allocation different for different people, it is also dynamic and it changes as per circumstances. But, make sure any change in asset allocation is done only with the aim of reaching your goals more efficiently.