How does asset allocation work?

The term "asset allocation" describes the distribution or allocation of your funds among various asset types, including cash, fixed income, debt, and equity. Asset allocation's main goal is to lower the risk involved with your investment. Not all of your assets may yield comparable profits for you. Market volatility may impact certain assets that offer returns related to the market. Therefore, by investing across a variety of asset classes, you can lower risk, reduce the likelihood of losses, and increase the likelihood of generating higher returns. Allocating assets for investments The composition of assets, or asset mix, in an investor's portfolio, is the most significant factor in determining the long-term investment performance of the investor. Although statistically speaking, the importance of elements like security and manager selection decreases as the length of the investment horizon increases, leaving asset allocation as the primary factor influencing the performance of investments. Therefore, proper asset allocation is the most important decision factor in any financial planning process. The asset mix is expected to include assets with higher rewards and higher risks, like equities, and assets with lower payouts and fewer risks, such as government bonds. In other words, policyholders who invest exclusively in debt funds (low risk, poor reward) cannot anticipate equity-type returns over the long term. Investor should balance their risk tolerance to optimise future value throughout the investing horizon. The capacity to accept a more likely temporary or a less likely permanent decline in the value of the investment is known as risk tolerance. Investors should limit their exposure to the riskier asset class of equities if they cannot accept a temporary decline in the value of their investments (also known as return volatility). Similarly, investors with a long working career ahead of them and who have few financial obligations in the medium term should include a high proportion of stocks in their overall asset allocation. For policyholders with various risk appetites and investment horizons, Life Insurance Company provides a broad selection of funds, including balanced funds (a blend of debt and equity), pure debt, and equity funds. For information regarding the availability of the funds as per your preference, please refer to the specific policy-related document. Following the requirements of policyholders, we protect in addition to savings-related life insurance and pension plans to help them save for their objectives, retirement planning, and the financial security of their families. How Important Asset Allocation Is It is challenging to forecast how the market will behave and how your assets will be impacted. Your risk is distributed across various assets, including fixed income, debt, and more, so variables like market volatility will have less of an effect when you invest in a variety of asset classes. By doing this, you may be sure that if one asset underperforms, you will still receive returns from assets that perform better. Overall, risk and reward are balanced in this manner. Allocating assets based on age Your age can be taken into consideration when allocating assets. You can choose the asset allocation for your investment portfolio using the rule of 100. To calculate the percentage of your portfolio investment in equity, you must deduct your age from 100. For instance, if you are 40 years old, you can put (100 - 40)% of your money into equity. Debt and cash are good investments for the remaining 40%. Your risk appetite decreases as you get older, so you might also need to cut your stock investment. For instance, using the same scenario as earlier, your allocation may be (100 - 50)% in equities ten years from now, when you turn 50. Cash and fixed-income securities may be used to invest 50%. The following are some significant variables that can impact your asset allocation: - Time frame Some programmes, like ULIPs, offer substantial long-term returns. They are appropriate for investments with a long time horizon. However, they could have a lock-in period. Consider investing in an asset class that allows you to withdraw whenever you want if you have a shorter time horizon for your investments and have goals like buying a car, travelling, and other things like that. - Risk-taking Investments are risky by nature. Different asset classes offer different levels of risk. The likelihood that your investment is secure increases with decreasing risk and vice versa. Your capacity to take a risk is referred to as your risk appetite. Consider investing in asset classes like equity or market-linked funds if your risk tolerance is higher. Consider investing in debt funds or fixed-income products if you have a lower risk tolerance. Conclusion You may optimise rewards and lower risk by allocating money properly to the right mix of assets. It is also crucial to recognise that each individual may have a different asset allocation. Additionally, as you age or your financial objectives change, your asset allocation may need to be adjusted.