Should I include the emergency fund in my asset allocation plan?

Should money that constitutes my emergency fund be taken into account in asset allocation while rebalancing? Or should it be considered separate?
- Dr Vijay Pratap Negi

I would suggest that don't be too focussed or too anchored to a specific overall asset allocation of your portfolio. It should be an outcome of you investing suitably for each of your investing needs. For instance, you can put the money in a bank account or a liquid fund for emergency needs. Now for any other investing needs which are likely to come up in the next three to five-year horizon, you should ideally be investing in high-quality fixed-income alternatives. Likewise, you should ideally have an equity-heavy investment portfolio for any of your goals or needs, which are over eight years away.

Now once you start allocating your money to each of these different needs according to their time horizon, your asset allocation will automatically evolve out of it. And likewise, while rebalancing your investments, focus on each investing need separately. Ensure that the asset allocation for each of these different needs does not go too much out of the way. When you rebalance, keeping this in mind, your overall asset allocation would be a natural outcome.

This article was originally published on July 23, 2021.