How asset allocation impacts your portfolio

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 A lot of people want to invest their money and make it work for them. But when it comes to investing your hard-earned money, a lot of people get confused with millions of investment options available in the market. A lot of people due to the confusion and 

lack of knowledge just end up investing in the old school investment options. Well, if you want to see your money grow you will have to do little homework. You will have to examine your financial health, your risk appetite and then you will find the right investment options for yourself. This process is what we call asset allocation. And in this article, we have put down everything you need to know about asset allocation. 

How asset allocation impacts your portfolio ?

Have you ever wondered how ace investors build emergency funds, invest in all asset classes, manage the risk and still achieve the highest returns on the investments? That's what a perfect asset allocation is. Knowing your investment types, risk appetite, financial goals and then selecting the right investment for yourself from millions of investment options available in the market is what a perfect portfolio strategy and asset allocation is. Do you also want to know how to choose the right investments and not only build but also manage your portfolio the right way? This article is for you. Now let's understand what the asset allocation is and how to do it for a perfect portfolio. 

What is asset allocation ? 

Asset allocation is the investment strategy created according to individual goals, capital, risk tolerance and most importantly their investment psychology. You must have heard that investing is an art and hence it differs from person to person. Even if two individuals have the same income their investment strategies cannot be the same. and that's why asset allocation is the skill every investor should learn. Asset allocation is your investment recipe that reduces the risk and focuses on growing your returns. Well now that you know what asset allocation is, let's jump to an exclusive guide on how to do an asset allocation.



How to do an asset allocation ? 

As mentioned above asset allocation is the recipe of investments that reduces the risk included and grows your returns. This recipe differs from person to person but there are a few things that you can consider while creating your recipe. 

1. Know your goals and time horizon 

Before investing your money you must know the purpose of your investment and the time for which you can keep your money invested. Investment options can be chosen based on the time you have. For example, if you want to invest for your retirement before 20 -25 years then you can just put your money in equity and let compounding do its magic but you cannot do the same for the investment for the car which you want to buy in 2 or 3 years. Investing for your long term, midterm and short term goals differently is a must. This way you will be prepared for the future and you will have your finances sorted for every stage of life be it your crazy bucket list or retirement. 

2. Choosing The one for yourself

Even if you know the purpose and time horizon for your investments you can still get confused between multiple investment options. You can choose the right investment for yourself based on the risk you can afford. If you are someone who just started your investment journey then you can go for SIP in equity mutual funds. Investing is not speculation so to find the right option for yourself you must study the financial markets and different investment options. You may not find The one very soon but it will be your first step towards financial freedom. 


3. Risk 

Most people are afraid of investing in new-age investment options due to the risk involved. But you can reduce the risk with effective asset allocation. To plan efficient risk management you will have to evaluate two things the financial risk and psychological risk you can bear. The financial risk is evaluating how much money you can invest or risk in your current financial situation. The psychological risk is the investor's psychology about risking his money. You have to know how much financial and psychological risk you can bear before investing. 

Now that you know what are types of risk let's jump on how to reduce the risk in your portfolio. To reduce the risk, you can invest a large part in blue-chip stocks or blue-chip mutual funds, debt funds, large-cap equity funds and a small part in the growth stocks or reputed cryptocurrencies.


4. Diversification 

We have learned since childhood never put all our eggs in one basket. Similarly in investing you can never invest all your money in one place. To reduce the risk and balance your portfolio you have to diversify your portfolio. 

With the growing investment opportunities in the market, old school investments like fixed deposits or saving schemes are not the option anymore. Your portfolio should include the different mutual funds, stocks of growing industries, the defending debt funds, gold ETF's, gold bonds the new age investment options like real estate investment trust funds and even some amount of cryptocurrencies for immediate growth. 

Your portfolio should consist of the defending investments as well as growth opportunities. As that's the key to financial freedom. 

5. Personal finance literacy

Personal financial literacy is most significant in asset allocation. Nobody can understand your personal finance the way you do so nobody can invest and allocate your money better than you. Personal finance is something nobody has taught us but it's the need of the hour. It's the age where you have to grow your money and beat inflation. To learn about personal finance, study different investment options. Evaluate new-age investment options like crypto, NFT's and put your step towards financial freedom. 

Asset allocation is different for everyone but the fundamentals are the same. Above were some fundamentals that you have to understand for effective asset allocation. To conclude asset allocation is the mix of knowing your goals and the time horizon, knowing the risk you can afford you are psychological and financial risk appetite, finding the right investment opportunities for yourself and mixing to achieve diversification and most importantly doing this all by yourself to achieve financial freedom is what asset allocation is, 


Now, what are you waiting for? Start investing, build your perfect portfolio according to your terms and start your journey towards financial freedom!!


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