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Asset Allocation

Asset Allocation

Juggling and selecting between different investment options (aka asset allocation) can be tricky, but Upstox has made this easy! Watch our engaging video from the #LearnWithUpstox series to know about asset allocation and how you can allocate your assets based on various factors.

Do you remember playing Business in your childhood? 

I'm sure you might have fond memories of this game - acquiring cities and building hotels. Oh my god, so much fun. But I'm sure you might be wondering why am I talking about Business right now? Does this game have any connection with today's topic? Yes, it does have a connection. 

But before that,

Hello and welcome to our series - Learn with Upstox.

In this series, we discuss ratio analysis, industry analysis, balance sheet analysis and many topics like that. And today, we will talk about Asset Allocation.

Here, we will discuss about:

  1. What is asset allocation?
  2. The factors affecting asset allocation.
  3. Strategies involved in it and 
  4. How to get started?

So, let’s begin.

What is Asset Allocation?

You must have played Business in your childhood. That game taught us about how to invest in real estate and how to generate returns from that. The only problem with this game was that we allocated all our funds in only one asset class - real estate. Doing this in real life would carry a lot of risk. 

That is what we learn here. 

Under Asset Allocation, we diversify our investments in various asset classes like equities, bonds, mutual funds, gold, real estate and many more. This is done with an aim to manage or reduce the risk associated with these assets individually. So, the question arises, why to diversify your investments? That is because we live in a world that is also called VUCA.


V stands for Volatile

U stands for Uncertain

C stands for Complex and

A stands for ambiguous

Which means that no single asset can be the best performer consistently because of so many macroeconomic factors. This has been proven many times in history as well. 

For example, in 2014, Indian Equity was the top performer. In 2015, debt was the top performer and in 2020, it was gold. If you had invested all your money in just one asset class, you might not have been able to get the due advantage of the same. That is exactly why we say, “Don’t put all your eggs in one basket.”

I think by now, you’re convinced that asset allocation or asset diversification is very important. But to diversify your assets, you need to know about how much of your total assets should go to each type of asset and for that you should know KYS. 

KYS stands for Know Your Self. Because that is what determines the factors that affect your asset allocation. So, let’s go through all these factors one by one.

The factors affecting Asset Allocation

  • Age: This is the first one and it follows a basic rule of thumb. Higher is the age, lower is the risk appetite and vice versa. At a young age, you have the capacity to risk out your investment. A general rule accepted is that 100 minus the age of the investor should be your allocation for equity. Let’s take a simple example: 100 - 20 (an investor’s age) = 80. So, 80% should be allocated to equity.
  • Time Horizon: If you have a goal with shorter duration, then you should have a higher allocation in debt. On the other hand, if you have a goal with a longer duration, you should have a higher allocation for equities.
  • No. of Dependents: Assume that your parents, children, siblings, and your grandparents are also dependent on you. In this case, because you have more dependents on you, you will require more liquidity in the short term which can be in the nature of emergency funds or in the nature of liquid funds.
  • Risk Profile: There are typically three categories of risk profiles and you have to identify typically which category you fit in.
      • Conservative: So basically, if I were a conservative type of an investor, I would not want to risk my money. In such a case, 70% to 80% of my assets would go in debt and obviously the balance will go in equity. 
      • Moderate: If I were a moderate level of investor or if I was okay with a moderate level of risk, then it would be a balance of debt and equity where 50% can go to debt and 50% can go to equity.
      • Aggressive: Now, if I were an aggressive investor, my 70 to 80% of allocation can be in equity. 


Let’s move on to the Strategies.

Strategies involved in Asset Allocation

This point focuses on the asset allocation strategies. Again, let’s make a list.

  • Strategic Asset Allocation: This involves determining a base policy mix and then sticking to the same. In short, it’s a long term strategy. In simple words, we assign a proportion to each asset class based on its expected returns and then whatever assets we buy in this, we hold them for a long period of time.
  • Tactical Asset Allocation: This involves a moderately active strategy usually implemented to benefit from short term market and economic events. Therefore, it gives that corridor to add the component of market timing and allows you to reap profits when certain events occur. 

Tactic is short lived and strategy is long lived. So the fund manager would try to grab an existing opportunity whatever is available in the short term, but would stick to the original strategy in the long term. 

  • Dynamic Asset Allocation: This is again an active asset allocation strategy, in which you can continuously change and adjust the asset mix depending on the market and economic conditions. Basically, it’s a short term investment strategy.

Moving on to our last and important question.

How to get started with Asset Allocation?

For this, I’ll tell you four simple rules.

  1. Asset Allocation can be done for different financial goals separately. What does that mean? It means that if I want to buy a house, I can have a separate asset allocation for that. And if I have another goal, for example, my child’s education, then I can have another asset allocation for that. 
  2. The second simple rule is to choose assets with weak correlation. Always remember, an asset class like equity and debt have a very weak correlation and these should be there in your portfolio. 
  3. Third one, don't be rigid about your risk profile. Risk profile of a person evolves with him/her and it can change over a period of time. That is why, 
  4. Do an asset rebalancing whenever you feel it is necessary to do so.  

And, we’ve come to an end. I hope that you found this helpful. If you want to read more of such articles, feel free to surf our blog. Or, you could also check out our YouTube channel. 

Thank you and have a great day!