In simple terms, asset allocation is a process designed to create balance in your portfolio by spreading your investments in various classes of assets. It is a strategy that focuses on balancing risk & reward by apportioning a portfolio's assets based on your appetite for risk, investment horizon and personal goals.
- There are broadly three main classes of assets- cash & equivalents, fixed income and equities
- All these three assets have different levels of risk & return, hence will behave differently over time
- The principle of asset allocation is based upon a time test adage: do not place all your eggs in one basket
- An investor can be safeguarded from volatility in the market only by diversifying investments amongst various asset classes
- Asset allocation works on the rule that different asset classes perform differently in the given market situations
- It is not always possible to predict performance of any asset class for a given period of time. This is where diversification helps mitigate or cut down, to some extent,the risks arising out of such uncertainty
- Investments in MF are regulated by SEBI and your fund managers provide regular updates on how your investments are performing along with the strategy & outlook