Asset mix is the breakdown of assets within a portfolio. Assets are assigned across the core asset classes of equity (stocks), fixed income (bonds), real estate and cash/cash equivalents. Asset mix is determined based on your risk-taking ability and life-cycle stage.
Why right asset mix?
Safety: The right asset mix makes use of diversification (Spreading investments across asset classes) to protect the portfolio from risk (volatility). You can ride the ups and downs of the market with confidence. Having a high allocation to equity offers high returns, but compromises on safety. A high allocation to debt offers safety, but you struggle to earn inflation-beating returns.
Achieve short-term and long-term financial goals: The right asset mix helps achieve short-term and long-term financial goals. For long-term financial goals an aggressive asset allocation (high exposure to equity) is crucial to enjoy inflation-beating returns. A conservative asset mix with higher allocation to fixed income is important to achieve short-term goals. The right asset mix prevents asset allocation to assets which don't add value to investment goals.
Best Returns: It's difficult to predict returns from assets. Gold may go up or stocks could crash. If your wealth is spread across assets, you enjoy the best risk-adjusted returns. According to the best wealth managers, more than 90 per cent of your returns comes from the right asset mix.
In simple terms, the right asset mix gets maximum risk-adjusted returns in-line with financial objectives, time horizon, risk tolerance and liquidity needs.
So which assets should be part of the mix?
The assets that are part of the mix include equity (stocks and mutual funds), fixed income (debt), real estate/house, gold, money market, commodities, cash and cash equivalents. Follow the simple thumb rule where 40-50 per cent must be in equities, 40-50 per cent must be in fixed income (debt) and at least 10 per cent must be in gold.
How to decide a right asset mix
Each asset class offers return and risk. Decide asset mix based on risk tolerance (ability to bear risk), time horizon (the time available to achieve financial goals), and the money available for investment. Investors with more money, longer time horizon and the ability/willingness to bear risk opt for an aggressive portfolio.
Aggressive portfolio: A high allocation to equities with a small allocation to fixed income for diversification; to achieve inflation-beating returns. (This is 50-60 per cent in equity and 20-30 per cent in fixed income securities).
Moderately aggressive portfolio: These are balanced portfolio with asset composition divided equally between equities and fixed-income. This is if you have medium level of risk tolerance and time horizon of more than five years. (This is 50-55 per cent in equity and 35-40 per cent in fixed income securities).
Very aggressive portfolio: This portfolio consists almost entirely of stocks. Ideal if you seek high capital growth over a long time horizon. (This is 80-100 per cent in equity and 0-10 per cent in fixed income securities).
Investors with less money, shorter time horizon and lower ability/willingness to bear risk opt for the conservative portfolio.
Conservative portfolio: A high allocation towards fixed income securities like bonds and money market instruments. A small exposure towards stocks offsets inflation. The main objective is to protect the capital while offering decent returns. (This is 70-75 per cent in debt and 20-25 per cent in equity).
Moderately conservative portfolio: This kind of portfolio has a high allocation to fixed income (50-60 per cent range) with a fair holding of (30-40 per cent in equity). The idea is to protect capital while taking on risk for inflation protection.
(The author is CEO and Founder of IndianMoney.com)