Confused About Investment Choices in Your 20s Or 30s? Experts Guide On Asset Allocation

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New Delhi: The stock market has seen a surge in retail participation, particularly among young investors, with the rising number of new demat accounts. This wave of fresh entrants into the market is driven by the attraction of equity and mutual fund investments. While these avenues promise attractive returns, they also come with varying degrees of risk. For budding investors asset allocation strategies are a good way to make informed decisions and help align investments with Financial Goals and risk tolerance. 

“Asset allocation helps spread investments across different asset classes which reduces the risk associated with any single asset class,” Amey Sathe, Fund Manager at Tata Asset Management, tells ABP Live. He says asset allocation strategies offer a structured framework that curtails impulsive decision-making driven by emotional reactions to market fluctuations. They provide a disciplined approach that proves invaluable, especially during turbulent market periods.

One of the most compelling benefits of asset allocation strategies is their inherent capacity to facilitate portfolio rebalancing. As Sathe puts it: “Portfolio Rebalancing allows investors to buy low and sell high, effectively capturing gains and reducing exposure to overvalued assets, contributing to sustainable portfolio growth.”

Over the years there have been many asset allocation strategies investors have tried and tested in different market scenarios. While there isn’t one particular path for every investor, here are some of the key asset allocation strategies investors often come across. 

Strategic Asset Allocation: This approach revolves around selecting and maintaining a suitable ratio of various asset classes, factoring in individual financial goals, risk tolerance, and investment horizon.

Tactical Asset Allocation: Investors employing this strategy dynamically adjust their allocations in response to short-term market trends or perceived opportunities, aiming to optimise returns.

Dynamic Asset Allocation: Closely related to tactical asset allocation, this approach involves actively altering the short-term allocation of different asset classes in response to changing market conditions. It often leverages automated systems based on financial models for swift decision-making.

Age-Based Asset Allocation: This strategy places age at the forefront when determining equity mutual fund allocation, making the strategy very useful for young investors. The rule of thumb is to subtract one’s age from 100 to calculate the equity allocation.

“One of the most common asset allocation thumb rule is that your holding in equity should be 100 minus your age,” says Saurav Basu, Head of Wealth Management at Tata Capital. 

“If you are 25, you could invest 75 per cent in equity and the remaining in debt. For youngsters who are first-time investors, multi-asset allocation funds that invest across asset classes and rebalance automatically would be apt,” he says. Adding systematic investment plans (SIPs) offer a path to long-term investment goals while mitigating the volatility associated with the equity market.

Asset Class And Diversification

Different asset classes come with distinct risks, and understanding these risks is essential for making informed investment decisions. 

Equity: Equity investments carry market risk, where their value fluctuates based on broader market conditions, economic factors, and investor sentiment. They also come with company-specific risks tied to financial performance and industry-specific challenges.

Bonds: Bond prices have an inverse relationship with interest rates, posing interest rate risk. Additionally, lower creditworthiness increases the potential for default risk, and fixed-income securities may not keep pace with inflation, leading to inflation risk.

Real Estate: Real estate investments can be less liquid than stocks or bonds, with potential liquidity risk. Property-specific factors, such as management issues or vacancies, can impact performance, and market conditions influence property values and rental income.

Commodities: The prices of commodities like gold or oil are influenced by global supply, demand, and various external factors.

Saurav Basu explains these risks with examples. 

“If you were to only invest in equity, and if the equity markets crash like the 2008, you would have to lose all your investment. If you were to invest only in debt, and if with rising inflation interest rate rises, you would see huge impact on your debt investments such as bonds and long duration debt mutual funds,” he says, adding that gold might outpace other assets during specific periods, in the longer term it may not always hold up the performance and lower overall performance of the portfolio. 

Diversification has emerged as a cornerstone principle in investing. By distributing investments across diverse asset classes, such as stocks, bonds, gold, and even real estate, investors significantly reduce the risk of a single asset’s downturn. Sathe from Tata Asset Management talks about some of the key reasons why diversification is crucial. 

“Diversification helps mitigate the risk associated with investing. By not putting all your money into a single investment or asset class, you reduce the impact of poor performance in any one area on your overall portfolio,” he says, adding that a well-diversified portfolio is less vulnerable to the extreme price fluctuations that can occur in individual stocks or sectors. “Diversification can help investors avoid making impulsive or emotional decisions. When you have a diversified portfolio, you are less likely to panic and sell during market downturns. Over time, the compounding effect of returns may significantly impact your portfolio’s growth.” 

Also Read: Preparing For Retirement? Here Is A Guide To Top 6 Plans And Investment Tips To Secure Your Golden Years

Evolve Investment Strategy With Age 

“As you age, your investment goals and risk appetite change. In your early years, it’s about bold moves and long-term growth. By middle age, diversify to balance growth with security. Nearing retirement, it’s about preserving what you’ve built,” says Aryaman Vir, CEO of WiseX. He says while saving might be the foundation of your investment, strategic asset allocation is the architecture of enduring financial health.

Echoes Saurav Basu: “Youngsters who have just started their financial journey have the advantage of time, allowing their investments to grow and compound over the years.” He says young investors have longer investment horizons and therefore they can take higher exposure to equitywhereas those who are nearing their retirement can limit their exposure to equity and invest more in debt to protect their investment from volatility”.

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