Asset Allocation and Portfolio Construction

Asset allocation and portfolio construction is a fundamental investing principle that helps investors maximize profits while minimizing risk. Investment process must start with deciding on how much to be invested in each asset class. Large weight for any one asset class will have impact on return or risk of the portfolio.As each asset class has its own level of return and risk, investors should consider their risk tolerance ( Volatility of price is the major risk of any asset class) , investment objectives, time horizon, and available money to invest as the basis for their asset composition. All of this is important as investors look to create their optimal portfolio.

Investors with a long-time horizon and larger sums to invest may feel comfortable with high-risk, high-return options. Investors with smaller sums and shorter time spans may prefer low-risk, low-return allocations. Safer investments have lower return potential. By prudent mixing, investor can provide stability and growth potential to the portfolio.

Broad asset classification can be Debt Funds, Equity Funds, Real Estate, Gold and Other Alternative asset classes. Debt funds are the safest among these asset classes as the underlying instruments for these funds are contractual obligation from borrower or issuer of debt instruments. For Equity investment, the main determining factor is the growth potential and dividend paid by the company.

In India, all the above asset classes are available either through mutual funds or through PMS. We are furnishing below the annualised return generated by various kind of funds and volatility as measured by standard deviation.

*as on 11 June 2020. CAGR in Percentage (%)