Asset allocation is the process of investing money across a variety of asset classes to achieve a desired goal. Basically, asset allocation is not putting all your eggs in the same basket. Mutual fund houses pool money from a number of investors and invest that money for the purpose of wealth creation. Asset Management Companies (AMCs) create different types of schemes to cater to different types of investors. The two most common types of investors are aggressive investors and conservative investors. A few investors are a mix of both and they seek optimum returns for the risk taken. 

Why is asset allocation important?

Markets are uncertain and nobody can predict how markets will react in the long-term and this where asset allocation helps an investor to stay on course to achieve his or her financial goals. Not all asset classes behave in the same way all the time. Investors find assets like stocks risky than fixed income. So whenever there is uncertainty or recession or high inflation, investors tend to invest in safe-haven assets like fixed income assets and gold.

When you invest your money across different assets, you are diversifying your risks. By doing so, your entire portfolio will be protected because even if one asset underperforms during a period, other asset classes can perform better. With this, you can achieve the twin goals of minimizing risk and maximizing potential returns. 

Different types of assets in mutual funds

Stocks or Equities

There are exclusive mutual fund schemes which invest in a mix of stocks. Though they are risky, they have the potential for giving good returns which helps you to build significant wealth in the long run. Equity MF schemes invest across various companies based on market capitalization, sector, industry, etc. 

Fixed income

These are financial instruments like bonds, fixed deposits, recurring deposits, debentures, etc. which give fixed income periodically till maturity. Upon maturity the principal amount is returned to the investor. These assets are considered less risky than stocks and bring stability to your portfolio. 

Commodities

There are commodities like gold and silver in which investors invest as part of their risk management strategy. Gold is considered a safe-haven asset and it is most sought after during uncertain times. Since the covid, this yellow metal has steadily risen and is trading at a lifetime high. In recent times, investors are also investing in silver as part of risk diversification. So as an investor you can invest in ETFS or Funds of Funds. 

Real Estate

This asset class is important if you are serious about asset allocation. You can invest in these assets through real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) for any potential gains. There are different categories of real estates like residential real estate, land, commercial real estate, warehouses, etc. 

Factors to look out for in asset allocation

Financial objective

Your asset allocation should take into account your financial objectives like your kid’s education, marriage, your retirement, your lifestyle, pension, etc. Only then you can arrive at a number and work backwards to know how much to invest, expected returns, number of investment years, etc. This will help you to plan properly in advance and also build a corpus for any emergency in the future. 

Risk tolerance

One of the main things to watch out for is an investor’s risk appetite or risk tolerance. Some investors would be conservative and they would not like their capital getting eroded. Though expecting higher returns is associated with higher risk, the opposite is not true. There are many investors who would like their portfolio to grow steadily every year with minimum risk. Aggressive investors may have higher risk tolerance and they would invest a bulk of their portfolio in equity related schemes. 

Time horizon

All investors must know time is money and it is more important to be invested for a longer period of time. If you want your money to compound then you should look at investing for a period of 20 years or 30 years and more. Even if a few years are volatile or do not give any good returns, if you are being invested and consistent in investing, your portfolio is very likely to grow and give you good returns due to the effect of compounding. 

Investor’s age

If you are a young investor, you have the room to be aggressive and you can think of investing a major portion of your money in equity. And, as you age, you can become a moderate investor having a mix of debt and equity in your portfolio or become a conservative investor in your late 50s and after 60. 

Where to invest

If you want asset allocation in your investments and looking at mutual fund schemes then there are a wide range of hybrid mutual fund schemes which invest across different asset classes. You can choose an AMFI-registered mutual fund distributor to invest in any hybrid funds of any AMC through Aetram Trades. 

The different types of hybrid fund mutual schemes available in the market are: 

• Aggressive Hybrid Funds  
• Arbitrage Funds
• Balanced Hybrid Funds
• Conservative Hybrid Funds
• Dynamic Asset Allocation
• Multi-Asset Allocation
• Equity Savings Funds 

Conclusion

If you are a long term investor, it is paramount to balance returns and risk. For this asset allocation is important and hybrid mutual funds offer the diversification in a single fund. You do not have to select different mutual fund schemes for asset allocation. If you select a good mutual fund scheme and stay invested over a long period of time then you can protect yourself from market volatility and grow your wealth as well as achieve your life goals.