Investing 101: Understanding Asset Allocation

13 Jan, 20234 mins read
Investing 101: Understanding Asset Allocation


  • The Art of Investing
  • Your Investment Blueprint
  • Asset Classes: The Building Blocks of Investing
  • Strategic asset allocation v/s Tactical asset allocation
  • Putting it All Together

Investing is like a puzzle, where you need to find the right pieces and put them together to achieve your financial goals. It's not a science, as there's no formula to guarantee success.

And it's not gambling either, where you rely solely on luck. Successful investing is about having a strategic plan and understanding the markets.

The Art of Investing

To be a successful investor, you need to go through a journey of discovering your preferences and creating an investment plan that suits you and helps you achieve your financial goals.

While there's no one-size-fits-all formula, there are techniques that can help you create an investment portfolio that works as hard as you do to achieve your goals. One such technique is asset allocation.

Your Investment Blueprint

As an investor, there are three aspects that need your attention:

  • Financial goals
  • Risk tolerance
  • Investment horizon.

Your financial goals will help determine the required rate of returns to achieve your target in a given period.

For example, if you have a financial goal of buying a house within the next five years and want to create a corpus for it, then based on your investment amount, you can calculate the expected rate of returns that you need to get there.

Risk tolerance is another important aspect to consider. Different instruments have different risk exposures and buying the one that matches your tolerance levels is important.

For example, if you have a lower tolerance and purchase a high-risk investment, then you might not be able to handle the volatility and make rash decisions. On the other hand, if you have a higher tolerance, then the investment might not perform up to your expectations.

The last aspect is the investment horizon. If your financial goal is to buy a house within five years, then you need investments that will cover the required rate of return with minimal risks within the period.

If an instrument requires a 7-10-year investment window, then it will be of no use to you. Therefore, it is important to understand the investment horizon that you are comfortable with and choose investments accordingly.

Asset Classes: The Building Blocks of Investing

Asset classes are like different colour paints on an artist's palette. Each colour represents a different type of investment, with its own unique characteristics.

For example, an equity mutual fund usually targets investors with medium-to-high risk tolerance and invests in stocks or equity-related instruments like preferred stocks, warrants, options, etc. Therefore, investors with similar risk tolerances would have an idea about the securities that the fund manager would invest in.

There are several popular asset classes in India, such as fixed-income, equity, gold, and real estate.

  1. Fixed income

Fixed income includes government securities, corporate bonds, corporate debt securities, money market instruments, etc. All securities that offer a fixed rate of return until maturity are covered under this asset class.

  1. Equity

Equity includes stocks and equity-related instruments. These securities offer returns based on their market performance which in turn is influenced by various social, economic, political, and other macroeconomic factors.

  1. Gold

Gold is an asset class that acts as a portfolio diversifier. With its reputation as a store of value, gold can help protect your portfolio against inflation and market volatility.

  1. Real Estate

Real estate is a tangible asset class that can provide stable cash flow and long-term appreciation. This can include residential or commercial properties, or investments in REITs (Real Estate Investment Trusts).

Strategic asset allocation v/s Tactical asset allocation

Strategic Asset Allocation is a long-term strategy where an investor has a static asset allocation mix and sticks to it regardless of market movements. Tactical Asset Allocation is a short-term strategy where the investor can occasionally deviate from the long-term allocation to take advantage of market opportunities, it requires considerable investment expertise and market timing.

Strategic Asset Allocation:

  • Typically has a static asset allocation mix, usually within a range, for example, 65-75% equity and 25-35% debt.
  • Adheres to the mandated asset allocation mix regardless of market movements.
  • Rebalancing may be required from time to time to maintain the mandated asset mix

Tactical Asset Allocation:

  • Allows for deviation from the long-term strategic asset allocation (70% equity and 30% debt mix) in order to take advantage of market opportunities
  • A common strategy is a momentum-based strategy where identifying momentum stocks and assigning higher weights to them in order to boost short-term returns
  • Tactical asset allocation is also applied within asset classes. For example, a fund normally intends to invest 50% in large cap, 15% in midcap and 35% in debt.
  • The key is knowing when the short-term opportunity has run its course and promptly rebalancing back to the target strategic asset allocation.

Putting it All Together

Asset allocation is like assembling a jigsaw puzzle. You need to find the right pieces and put them together to achieve your financial goals. By understanding your financial goals, risk tolerance, and investment horizon, you can create an investment

Stack is your expert wealth management platform that can do this for you. Choose your investment horizon, and risk tolerance and we will curate a mutual fund portfolio to reach your goal ✨ Our aggressive long-term portfolio can give you up to 17% returns, outperforming the markets and beating inflation at the same time.

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disclaimer: the information provided in this blog is for general informational purposes only. it should not be considered as personalised investment advice. each investor should do their due diligence before making any decision that may impact their financial situation and should have an investment strategy that reflects their risk profile and goals. the examples provided are for illustrative purposes. past performance does not guarantee future results. data shared from third parties is obtained from what are considered reliable sources; however, it cannot be guaranteed. any articles, daily news, analysis, and/or other information contained in the blog should not be relied upon for investment purposes. the content provided is neither an offer to sell nor purchase any security. opinions, news, research, analysis, prices, or other information contained on our blog services, or emailed to you, are provided as general market commentary. stack does not warrant that the information is accurate, reliable or complete. any third-party information provided does not reflect the views of stack. stack shall not be liable for any losses arising directly or indirectly from misuse of information. each decision as to whether a self-directed investment is appropriate or proper is an independent decision by the reader. all investing is subject to risk, including the possible loss of the money invested.

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