Understanding asset allocation

To keep it very simple, asset allocation means spreading your investments across various asset classes like equity, debt, real estate and commodities, etc. This way, a poor performance by one asset class may not heavily impact your overall portfolio.

Investing in debt

The fixed-income asset class is one of the oldest forms of investment. It includes corporate and government bonds, corporate debt securities, money market instruments, etc. Fixed income securities endeavour to pay investors interest until maturity. Bank FDs (fixed deposits), PPF (Public Provident Fund) and debt funds are a few such examples. Debt or fixed income is a crucial component of many investment portfolios as it helps reduce volatility and preserves your wealth. While this limits potential gains, it also limits risks, making debt investments ideal for risk-averse investors.

Investing in equity

Equity investing means purchasing shares and becoming a part-owner of a business. If the company performs well the share price generally goes up. For instance, if you have bought shares of a large company and the company constantly performs well this may result in increase in value of your holdings and wealth creation in long run.

Historically, equity has offered comparatively higher returns in the long term for those willing to endure short-term volatility. However, investing in equity requires careful analysis as equities are highly volatile. If you are new to this, you may need professional guidance.

Investing in real estate and commodities

Let's start with gold. Besides its cultural significance, the precious metal is seen as a safe alternative in times of high uncertainty.

Meanwhile, real estate is another asset class Indians are comfortable with. That's because it is a physical asset that may provide rental income and capital appreciation in the long run. Now that you know what these asset classes bring to the table, let's understand how you may spread your money across them to minimise risk.

• Option 1: You may do it yourself. But this is only applicable for those who have an understanding of different asset classes, the sectors within and the risks associated with the asset classes.
  
• Option 2: Invest through mutual funds.

Investments through mutual funds

Mutual funds use a professional manager's expertise to invest in various assets, including equity, debt, and even commodities and real estate. Essentially, these professional fund managers invest on your behalf.

That said, don't just invest in any mutual fund, as investing is personal. Consider your age, risk appetite and time horizon before investing.

Last but not least is the importance of reviewing once portfolio's on a regular basis and rebalancing the asset allocation from time to time depending on individual goals, investment horizon and individual needs. Asset allocation strategies differ for each individual. The important part is to understand the worth of each asset class in your overall Investment strategy and build a portfolio accordingly.