Focusing on asset allocation is as important as paying attention to earnings and returns on investments. The idea must be to choose and segregate investments based on short-term and long-term financial goals. This ensures that you have allocated your money into assets depending on your risk profile while also conforming to your financial objectives. Besides earning good returns, the idea behind an effective asset allocation is to ensure that the corpus is accumulated within the stipulated time period.
Deciding on optimum asset allocation
This means that you can put your money into equities if you are planning to park your funds over a reasonable tenure ranging between 15 and 20 years, while the amount can be put in debt if you are willing to wait for at least more than three decades. Your asset allocation and goals must be in sync with your investment time frame. Also, asset allocation is expected to change with time as the proclivity to take risks is reduced over time, which means that investors tend to rely on debt investments more than equities owing to less risk involved. As investors approach their financial goals, the ability to take risks on the portfolio is greatly reduced.
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Allocating for short-term goals
Investors can have short-term investment goals like creating a good enough emergency corpus or having adequate money for house renovation, going out on a vacation, and more. Since these goals must be met within a short period, both the quantum and tenure of investments are limited. Considering how the volatility in the stock market over a small period can deplete your corpus instead of earning good returns, it makes sense to put your money in debt funds, fixed maturity plans and bank deposits. These investments though earn limited returns are more stable, thus, ensuring their place in investment portfolios designed and planned for short-term investors. The following table highlights how a monthly investment of ₹10,000 in recurring deposits and debt funds over three years can help.
Monthly Investment (in Rs) | Name of the Investment | Type of Investment | Rate of Return (in %) | Investment Tenure (in years) | Accumulated Corpus (in Rs) |
| 10,000 | Aditya Birla Sun Life Medium Term Plan | Debt Fund | 8.55 | 3 | 4,11,648 |
| 10,000 | SBI Magnum Medium Duration Fund | Debt Fund | 7.86 | 3 | 4,07,150 |
| 10,000 | ICICI Prudential Medium Term Bond Fund | Debt Fund | 7.56 | 3 | 4,05,214 |
| 10,000 | Recurring Deposits | Bank Deposits | 6.4 | 3 | 3,97,834 |
One may also invest in a lump sum, which means that investors may put money in one go and wait to earn returns from the portfolio invested for a short period.
Lump sum Investment (in Rs) | Name of the Investment | Type of Investment | Rate of Return (in %) | Investment Tenure (in years) | Accumulated Corpus (in Rs) |
| 3,00,000 | Aditya Birla Sun Life Medium Term Plan | Debt Fund | 8.55 | 3 | 3,83,717 |
| 3,00,000 | SBI Magnum Medium Duration Fund | Debt Fund | 7.86 | 3 | 3,76,446 |
| 3,00,000 | ICICI Prudential Medium Term Bond Fund | Debt Fund | 7.56 | 3 | 3,73,313 |
| 3,00,000 | Recurring Deposits | Bank Deposits | 6.40 | 3 | 3,61,365 |
In tune with one’s financial goals, one must decide on investments keeping the end corpus in mind. Take, for example, you are looking for a corpus of ₹5 lakh after three years.
Desired Corpus (in Rs) | Name of the Investment | Type of Investment | Rate of Return (in %) | Investment Tenure (in years) | Monthly Investment (in Rs) |
| 5,00,000 | Aditya Birla Sun Life Medium Term Plan | Debt Fund | 8.55 | 3 | 15,795 |
| 5,00,000 | SBI Magnum Medium Duration Fund | Debt Fund | 7.86 | 3 | 15,636 |
| 5,00,000 | ICICI Prudential Medium Term Bond Fund | Debt Fund | 7.56 | 3 | 15,567 |
| 5,00,000 | Recurring Deposits | Bank Deposits | 6.4 | 3 | 15,302 |
The emphasis for short-term investments should be on consistent returns.
Allocating for long-term goals
Investors may save for long-term goals that require more than a decade of investments. One may then invest in equities depending on their risk profile. Since many investors classify investments over five years in the long-term category, gold bond investments may also be considered. For example, the investment tenure of sovereign gold bonds is eight years, thus, allowing decent returns while serving as an essential hedge against inflation and sudden downturns in the stock market.
Long-term goals allow for greater flexibility in selecting investment options. These objectives could include retirement, home ownership, child education, and so on. Because the maturity period is longer, you can invest in instruments other than fixed-income securities. To achieve inflation-beating returns, make equity the primary component of your portfolio. You can choose an equity-heavy or a balanced equity-debt asset allocation. It is primarily determined by your risk tolerance in relation to the expected returns.
For example, you may decide to continually invest for 25 years at a stretch. You may do so in equity mutual funds that allow you enough scope to earn good returns in the long run. The following table shows how monthly investments stepped up regularly by at least 10 percent every year in equity funds can help one accumulate the much-desired corpus.
Monthly Investment (in Rs) | Name of the Investment | Type of Investment | Rate of Return (in %) | Investment Tenure (in years) | Accumulated Corpus (in Rs) |
| 10,000 | Canara Robeco Bluechip Equity Fund | Large Cap Fund | 14.22 | 25 | 5,45,18,145 |
| 10,000 | Edelweiss Large Cap Fund | Large Cap Fund | 12.33 | 25 | 4,19,94,769 |
| 10,000 | Quant Mid Cap Fund | Mid Cap Fund | 19.73 | 25 | 12,79,81,817 |
| 10,000 | PGIM India Midcap Opportunities Fund - Direct Plan - Growth | Mid Cap Fund | 17.47 | 25 | 8,87,89,976 |
| 10,000 | Quant Small Cap Fund | Small Cap Fund | 22.28 | 25 | 19,77,95,434 |
| 10,000 | Kotak Small Cap Fund | Small Cap Fund | 15.18 | 25 | 6,26,54,467 |
| 10,000 | HDFC Balanced Advantage Fund | Balanced Advantage Fund | 11.62 | 25 | 3,82,46,024 |
| 10,000 | Edelweiss Balanced Advantage Fund | Balanced Advantage Fund | 11.55 | 25 | 3,79,00,232 |
Alternatively, investors may choose to put their money in a mix of equity funds and fixed-income instruments. This will lend them not only good returns but also the much-needed stability that they look for in the long run while working towards their financial objectives.
First evaluate your short and long-term objectives before allocating your funds to appropriate asset classes. The general rule is to avoid combining short-term and long-term goals in the same allocation.
