How to make your money work hard and earn good returns

Asset allocation, is actually both an art and a science. Here's how to make the most out of your asset allocations to various sectors.

We all know how putting 'all eggs in one basket' would be detrimental and about how one rotten egg could spoil the rest. Asset allocation or diversification is vital to managing risk and that in turn is critical to optimise on returns. Thus, the need to arrive at a prudent mix of debt and equity, predominantly on the basis on one's financial goals.  

Basic premise of asset allocation

A fundamental case for asset allocation is that different asset classes offer returns that aren't perfectly co-related. Hence diversification reduces the overall risk in terms of the variability of returns. Statistics show that more than 90 per cent of the returns of the portfolio depends on asset allocation, while individual selection of securities only plays a miniscule role. Prepare a financial plan; and invest prudently by aligning your surpluses with your risk/return profile, key financial goals and complementary investment options.

Approach to asset allocation

The key to a successful approach to diversification is to research investment avenues and add only the ones that are negatively correlated. It is also important to rebalance assets on a time-to-time basis to ensure that the portfolio is adequately diversified.

The chart above shows a sample asset allocation plan for varying age groups

Identifying asset cycles

Asset allocation is not just a one-time effort; apart from aligning it to one's financial goals, risk appetite, age etc., there is another parameter: being in the right place at the right time. Here's a quick look at how various asset classes have fared and how certain asset classes have done better than the others at various points in time.

Gold has continued to shine this year round as well; being considered a safe haven amidst all the global weakness. Equities, on the other hand, have made little progress during the year. The Euro crises meant that the market lost out in a big way just in the matter of a few trading sessions. All eyes are on currently on fixed income instruments; with the short term interest rates having gone up significantly, analysts are betting heavily on them. Realty may have had a bit of a turnaround, but it still has a long way to go in terms of demand pattern and valuations.

The table above shows how equity, debt and gold have fared over the years.

Asset allocation is pertinent to optimise your returns and stay well within the preferred risk profile. Regular monitoring will help manage risk in alignment with financial goals and create wealth in the medium-long term. Diversification is an effective way of making your money work hard for you!

Tips for asset allocation

• Start your asset allocation with tax planning and remember not to put all your eggs into one basket
• Align your investments such that they are well balanced and negatively correlated
• Plan your investments across -- Short, Medium and Long term
• If markets have run up sharply, be cautious, even if you can afford to take risk
• Use de-risked investment styles like systematic investments