Rule for Asset Allocation

Studies have shown that the right asset allocation contributes to 90% of portfolio performance and not the scheme or market timing. Therefore, proper asset allocation is the key to determine return in the portfolio. One should always maintain balance in the various asset classes and the motto should be to beat inflation rather than chasing the highest return schemes.

Generally, we get six different asset class to invest in:

• Equity (including international equity)
• Real Estate
• Debt (bonds / debentures / FD / PPF / EPF)
• Gold
• Insurance 
• Cash 

After understanding the nature of each asset class one should decide the exposure in a risky asset class.

Asset Allocation as per Risk Profiling 

One way is to get done your risk profiling first and then make asset allocation depending on your investment time horizon. Will write more on this later in detail.

Asset Allocation as per Thum Rule

While, if you go along with the thumb rule then divide your Rs. 100 into the different asset class with the following formulas:

Ø  Equity Exposure = 100 – your Age

However, allocation in Equities will mainly depend on the tenure of financial goals and Risk Profiling is essential to understand whether an investor is Aggressive, Moderate or Conservative

Ø  Real Estate: there is no thumb rule for real estate exposure as such. However, it is recommended to have one house at least or commercial property

Ø  Gold: Around 10% of the total portfolio value

Ø  Insurance: should be around 5% of your annual income

Ø  Cash: for contingency need at least  6 months of your monthly expenses

Ø  Debt: remaining all balance amount