Asset Allocation

In layman's language, asset allocation means putting all of your eggs in different baskets. Here eggs means money and baskets means different asset classes. Asset allocation is very important in financial planning because various asset classes perform differently in different market conditions.

Risk is directly proportional to returns. Where there is high risk there is high return and where there is low risk return is also low. Equity has high risk hence can expect high return. Deft fund like Saving account, PPF etc have zero risk hence returns are also low.

Here is the Rule of Thumb for asset allocation.

100 – your Age = % Equity Allocation of your portfolio

Thus, if your age is 25 years than you should invest 75% in Equity in 25% in debt while if your age is 50 years than you should invest 50% in Equity and 50% in Debt.

Many people started investing lots of money in gold after 2003-2010 gold rally. But remember that, equity is the  only asset class which can give you highest returns than any other asset class in the long run. So don’t ignore the importance of equity in your portfolio & never invest more than 10% of your net worth in Gold.

• If you are in age 20s & early 30s, when you don't have much dependents and retirement is still far away, you should invest 100% in equity & 0% in debt to build enormous wealth.
• Remember, equity is the most powerful asset class to build wealth if you start early and stay invested for more than 10 years of time horizon.
• Many financial advisors advise people to invest 100% in debt after retirement (60 years) but I personally believe that, one should invest in equities even after retirement.