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Choose different ways of asset allocation for investment returns

Investment horizon will also determine the choice of assets as a higher time period will allow you to invest in equities and vice versa

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Asset allocation is deciding how to distribute your money across different asset classes like equities, property, etc. Consider your present financial situation before allocating assets. Age, along with your income helps to determine your risk tolerance levels. Investment horizon will also determine the choice of assets as a higher time period will allow you to invest in equities and vice versa.

Strategic asset allocation: This creates an asset mix that seeks to provide the optimal balance between expected risk and return for a long-term investment horizon. Investors generally assign target percentage allocation for each asset class. If the investor’s long-term objectives and risk tolerance are best served by 70% equity and 30% fixed-income portfolio then that will be set as their target portfolio. Rebalancing to the target allocation will help in selling profitable investments and reinvesting it in asset class which is lagging behind.

Tactical asset allocation:  This provides mix to capitalise on unusual or exceptional investment opportunities, allowing room to participate in economic conditions more favorable for one asset class than for others. The strategy is a moderately active strategy, since the overall strategic asset. This strategy demands that you must first be able to realise short-term profits, and then rebalance the portfolio to the long-term asset position.

Insured asset allocation: Here, you first establish a base-portfolio value below which the portfolio is not allowed to drop. Until the time the portfolio is above the base value, you actively manage the portfolio and maximise returns. If, however, the portfolio should ever drop to the base value, you invest in risk-free assets.

Core-satellite asset allocation: This strategy is more or less a hybrid of both the strategic and tactical allocations mentioned above. Here, your portfolio is essentially made up of two components. First, a core holding of equities, bonds, or index funds make up the bulk of your portfolio. This is the strategic component. The core of your portfolio may consist of anywhere from 60-80% of your total portfolio.

The remaining portion, satellite allocation, which may implement more of a tactical approach. While your core holdings make up the bulk of your portfolio and won’t change much over time, your tactical component allows you to find opportunities in the market and add alpha. Alpha is a measure of the active return on an investment.

Asset allocation can be an active process or strictly passive in nature. The choice of an asset allocation strategy or a combination of different strategies depends on the investor's goals, age, market expectations and risk tolerance. The investor needs to have good advice from the qualified and experienced investment advisor, who knows indepth on investor’s risk profiling, future cash-flow requirement, and other financial commitment. Guidance from the investment advisor on continuous basis also plays an important role for the wealth maximisation as well as to avoid any financial disaster going forward.

The writer is chief investment officer, LIC Mutual Fund

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