The key to finding a good investment portfolio that can help you achieve your financial goals and objectives is getting the right asset allocation. For investors new to the world of investing, this might seem an alien concept. This article will help you understand asset allocation and how to choose a mutual fund to create the right asset allocation strategy for your portfolio.
In any investment portfolio, there are two strategies that are quite essential. One being diversification of the portfolio and the other being adopting the right asset allocation strategy for your scheme. There are times when investors, especially the newbies, confuse these strategies as one. However, in reality, they are quite different from one another. Let’s understand these two diverse concepts. Basically, diversification is the process of spreading your mutual fund investments in varying companies or investment options. On the other hand, the process of asset allocation requires investors to understand their risk profile and investment objective and accordingly spreading their investments into different asset classes. You might already know that mutual funds offer investors diversification. However, if you play your cards right, and choose a mutual fund carefully, you can also make a good asset allocation portfolio.
As you might already know, mutual funds are not an investment option in itself, but rather an investment vehicle. It permits investors to invest in varying asset classes via professional management. Basically, you do not technically invest in mutual funds, but via mutual funds. Nowadays, you can get exposure to almost all kinds of asset classes i.e. debt, equity, real estate, and gold through mutual funds. Mutual funds are undoubtedly a well-managed and diversified investment vehicle. So, an investor might as well not look at any other financial vehicle but mutual funds. They can easily help design an investor’s entire investment portfolio. Let’s understand in brief some of the different types of mutual funds available to an investor.
- Equity mutual funds – Equity funds are necessary to create a growth-oriented investment portfolio. However, do not miss the risks associated with equity investments. You can invest in equity, either directly via shares or through equity mutual fund investments.
- Debt mutual funds – Also known as fixed-income securities, these investment havens include investment options such as bank fixed deposits, tax-free or infrastructure bonds, post office savings, etc. These funds are known to be relatively safer and stable than equity funds. However, these funds have a major drawback of producing low-yielding returns.
- Gold ETFs – Indians are emotionally connected to these assets and thus have always been a part of their personal assets. Gold ETFs are one of the most popular investment vehicles to invest in gold. This terminates the need to pay for custodian charges or making charges as one does in buying a piece of gold jewellery.
Every investment planning should begin with having a flair idea of investment objectives and risk appetite. Asset allocation strategy should be devised after considering the above two factors. Happy investing!