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Multiply Your Money Part-2

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“Therefore, efficient asset allocation is the only way to generate consistent wealth and get returns above inflation at a given level of risk. It is part of financial planning which should start from day one. In our opinion, assets allocation is must for all, whether the person is young or old, or is into services, business or is the retired one,” says Manish Bandi, head, PMS, India Infoline Ltd.

I V Subramaniam, senior fund manager, Quantum Asset Management Co, agrees, saying, ”Asset allocation is suitable for all type of investors and is basically a disciplined way to generate wealth.”

However, asset allocation “makes more sense for HNIs as the quantum of money involved gives them the necessary scale to justify the effort and time involved in maintaining a constant strategic asset allocation through a scientific rebalancing. Moreover, it’s the best way to book profits while maintaining the same level of risk,” informs Ashish Kapur, CEO, Invest Shoppe, investment consultant.

Asset allocation, however, can be of two broad types: strategic and tactical. While strategic allocation seeks to maintain an overall allocation pattern over a long term, tactical asset allocation would tinker with the broad portfolio to effect changes for a short term to benefit from any temporary upswing in any particular asset class.

So, is that a universal panacea? Maybe not, since the best way of asset allocation depends on individual conditions or risk appetite. There is a thumb rule though, that a person should invest as much percentage in debt or related instruments as his age, while the rest can be invested in equity or related instruments.

“This would imply that as a person ages, he should progressively reduce his exposure to equity and allocate more money towards safer assets like debt. For instance, a retail investor aged 30 should allocate about 30% of financial assets to debt while a sixty-year old should have 60% assets allocated to debt or other conservative assets,” advises Mr Kapur. Nifty logic, that.

But the flip side is that what may be a good asset allocation for one individual, may not be the same for another — simply because of the differences in risk aversion. However, to diversify, as a principle, one should allocate some proportion of assets to equity, debt, and real estate.

“Typically, if the investor is young, then a higher allocation to equity (for higher returns) would be desirable as compared to an investor who is close to his retirement, where a higher allocation to fixed income is desirable,” says Sandeep Neema, fund manager, equity, JM Financial MF. Continued on.... Multiply Your Income & Earnings Part-3

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