The other day one of my young friends, suddenly rich with Rs 50,000, was wondering what he should do with the money. Exhausted after blowing up a similar sum, he wanted to put this Rs 50k to productive use, but was quite clueless about what to do and how.
If ever you are also so caught, just seek answers to some of these questions: The most important question, of course, is `where to invest?' Having different answers is not a problem, but not having any certainly is. Clarity of purpose is crucial to an investment decision. Young investors, such as my friend, may as well begin with the idea of asset allocation.
Quite simply, asset allocation is building a portfolio — an assortment, if you will — of assets such as equities, fixed-income instruments, gold and property. The investments should be in line with your risk appetite (that is, the extent of risk you are willing to take) and your probable cash requirement, in the near-to-medium term (say, one/two years).
As an economy goes through the ups and downs, one set of asset — for instance, real-estate, now — will shine while the other parts of your portfolio remain lacklustre. The idea of combining a set of assets is that today's non-performer will be tomorrow's star.
Young investors getting in for the long term may prefer to take high risks. So a chunk of the investment can be channelled towards direct equity and equity-related instruments, and the rest distributed among fixed income instruments and other such less risky asset classes. Normally, in the long run, equity investments tend to offer superior returns.
Though in the past few years different asset classes have peaked around the same time, distributing your investments in various asset classes would help you contain losses when the equity market goes into a low. The advantage of long-term equity investment, compared to bonds, debentures, gold or property, is that the returns are almost unsurpassable in absolute returns. The fact that investments in equities can be initiated even with a small sum makes it attractive compared to the pricier gold or property. The easy exit option offered by equity allows you to diversify the risk element when the stock market is on a low and other asset classes appear more attractive.
But if you are the cautious type, keen on the safety of the initial capital investment, then you should invest mainly in fixed-income instruments, bonds and other such less-risky investment avenues.
By balancing different types of assets, you are trading the so-called `best returns' that you might have got had you timed the market perfectly - an impossibility - for predictability and peace of mind. But arriving at an optimal asset allocation mix is possible. All you need to do is to determine your investment goals vis-à-vis your risk tolerance and decide on the duration you plan to remain invested.
Asset allocation does help you reduce the impact of market's peaks and bottoms, but remember that you cannot forever escape market fluctuations. You need to consider the historical performance of the assets you plan to invest in before a final decision is taken. A review of the strategies, in tandem with the value of your investments, your personal goals and the market conditions is vital. You cannot beat the market all the time, but a good asset allocation strategy can increase the chances of your beating the market most of the time.
If ever you are also so caught, just seek answers to some of these questions: The most important question, of course, is `where to invest?' Having different answers is not a problem, but not having any certainly is. Clarity of purpose is crucial to an investment decision. Young investors, such as my friend, may as well begin with the idea of asset allocation.
Quite simply, asset allocation is building a portfolio — an assortment, if you will — of assets such as equities, fixed-income instruments, gold and property. The investments should be in line with your risk appetite (that is, the extent of risk you are willing to take) and your probable cash requirement, in the near-to-medium term (say, one/two years).
As an economy goes through the ups and downs, one set of asset — for instance, real-estate, now — will shine while the other parts of your portfolio remain lacklustre. The idea of combining a set of assets is that today's non-performer will be tomorrow's star.
Young investors getting in for the long term may prefer to take high risks. So a chunk of the investment can be channelled towards direct equity and equity-related instruments, and the rest distributed among fixed income instruments and other such less risky asset classes. Normally, in the long run, equity investments tend to offer superior returns.
Though in the past few years different asset classes have peaked around the same time, distributing your investments in various asset classes would help you contain losses when the equity market goes into a low. The advantage of long-term equity investment, compared to bonds, debentures, gold or property, is that the returns are almost unsurpassable in absolute returns. The fact that investments in equities can be initiated even with a small sum makes it attractive compared to the pricier gold or property. The easy exit option offered by equity allows you to diversify the risk element when the stock market is on a low and other asset classes appear more attractive.
But if you are the cautious type, keen on the safety of the initial capital investment, then you should invest mainly in fixed-income instruments, bonds and other such less-risky investment avenues.
By balancing different types of assets, you are trading the so-called `best returns' that you might have got had you timed the market perfectly - an impossibility - for predictability and peace of mind. But arriving at an optimal asset allocation mix is possible. All you need to do is to determine your investment goals vis-à-vis your risk tolerance and decide on the duration you plan to remain invested.
Asset allocation does help you reduce the impact of market's peaks and bottoms, but remember that you cannot forever escape market fluctuations. You need to consider the historical performance of the assets you plan to invest in before a final decision is taken. A review of the strategies, in tandem with the value of your investments, your personal goals and the market conditions is vital. You cannot beat the market all the time, but a good asset allocation strategy can increase the chances of your beating the market most of the time.
Source: Business Line
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