Asset Allocation – a brief overview
According to investopedia asset allocation is – “an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.”
These factors goals, risk tolerance and investment horizon leads to investment across various instruments and these factors are highly dependent on age of an individual – at a young age an investor might take substantial amount of risk but as he becomes old his risk tolerance decreases.
Generally a type of investor can be found out by asking a few simple questions which will determine the risk taking ability of an individual. Professional financial planners can help you with this.
A few asset allocation strategies according to age:
Age group 20 to 35 years –
At this age an individual starts his career and is very aggressive and also is a risk taker. Earnings for an individual are less so he tries to earn more by investing in risky bets like stocks and ETF’s. The proportion of Equities in once portfolio is around 70 to 80%, Real Estate and Fixed income, Fixed deposits would be 20 to 30%.
At this age the one may even consider trading in derivative instruments.
Age group 36 to 50 years –
At this stage of live an individual is generally well settled with a home which he owns. His risk taking capacity decreases a bit but his earnings increase to his lifetime peak at this age. Here one starts plan for a child’s future and shifts 10% odd from equities to fixed deposits or any other fixed income instrument. At this age many of them buy a pure term plan. The best time to buy your first term plan would be when you get your first job (at the age on 24-25), later one should increase the coverage or buy a new term plan at the age of 35 – 36 years.
Age group 50 to 60 years –
At this age if an individual is still working he earns his maximum and becomes risk averse person and shifts his focus on fixed income instruments. Here investment in equities would be 40 to 50% while Fixed income and real estate would be 50 to 60%.
Age group 60 years and above –
At this age an individual generally retires and looks out for most safest investment avenue as he doesn’t earn any thing now. He becomes a risk averse person. His portfolio would consist of 20% equity and 80% of real estate and fixed income.
Here is a Pictograph for the same:
Closing comments –
- Equity SIP and Mutual Funds are termed as risky instruments just like equities. SIP are highly dependent on the market and they tend to reduce the investment risk.
- Many industry experts term investment in real estate as a good investment option in India. The property prices in Mumbai have given 300 to 400% returns in the past 12 odd years.
- This is a general overview of asset allocation but in real life it depends on each individual his earnings and thought process.
- There are many more investment avenues which an investor might consider.
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