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AxisDirect-O-Nomics
Oct 17, 2018 | Source: www.moneyguruindia.com
Passive investing has of late become a key element of personal finance. This style of investing uses the benchmark indices to arrive at asset allocation decisions. Can it help asset allocation?
Investing is not a simple task. First, there are so many asset classes: equity, fixed income, commodities, cash, etc. Moreover, within varied investment classes, there are multiple product providers, each having different options. Also, various investment options are provided by banks. Sometimes too many options tend to be highly confusing.
So what should investors take into account when deciding what and where to invest based on their investment goals?
A general investment rule used by many is “Don’t put all eggs in one basket”, because different returns are provided by the different asset classes. Equities generally provide higher returns while fixed income are more moderate. However, higher returns usually involve higher risks. Investors evaluate a portfolio’s goal and its risk return ratio in relation with the expected time horizon to help determine the appropriate asset allocation strategy.
Do investment styles affect asset allocation?
Yes, definitely. As discussed earlier, the guiding factor for any investment strategy is defined by goals, risk reward ratio, and time horizon. These identify an investor’s preferred style of investment. The aggressive style is where an investor’s capacity to take risks is higher and reflects expectations of a higher return, generally with shorter time frames. In contrast, the conservative style is where an investor has a low tolerance to risk and modest expectations of return in relatively longer time frames.
Of course, some investors prefer a blended style with moderate risk and moderate return expectations. If we consider individuals, age is an additional factor as at a younger age, aspirations vary and usually include better lifestyles like buying of a home, car, etc. The ability to take risks at a younger age profile is higher than later in life when priorities change to children’s education, retirement planning and stability in income generation. An investor’s asset allocation strategy has to consider all the above factors to create the right mix.
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