Factors that play an important part in determining your asset allocation strategy

In March 2020, there was mayhem in markets and stocks fell like nine-pins. Ten months later, financial markets have not only recovered losses but also hitting new highs. However, the dilemma when investing is that even good things can be tricky to handle. Investors, who have witnessed a wonderful rally over the last few months, are now wary of losing those returns should the markets change course from here on. This is where asset allocation comes in very handy.
Having a proper asset allocation in place and adhering to it will ensure that investors can sleep peacefully no matter in which direction various asset classes may be heading. This is possible because asset allocation approach smoothen investment journey and takes away extreme swings in overall portfolio value.
Now coming to the practical part of asset allocation. When deciding on asset allocation, there are four factors that play an important part in determining your asset allocation strategy.

1. Risk tolerance -Here, you should be looking at the willingness to brave market ups and downs for better potential returns in the long-term. The question here is are you happy with 20% gain and is also willing to take a 20% loss?
2. Time horizon – How long can you stay invested without withdrawing/selling your investments? How long do you expect the corpus to last?
3. Financial objectives – What are your financial goals? Do you want to invest to improve your current lifestyle, or build a corpus for your children’s education or maintain the current lifestyle post retirement?
4. Liquidity needs – How much do you need each month to maintain your current standard of living? What are your present assets? Do you expect to spend a lot of money in the near future on marriage, education or a medical exigency?
   It is based on the answers to these questions that the right asset allocation can be decided.
   However, once decided and implemented, it is important to periodically review and re-balancing, as a means to reflect the changing realities of your life stages.
   When it comes to fund performance, ICICI Prudential Asset Allocator Fund has been a consistent performer in its category.
   Rishi Gupta,
   Mutual Fund Distributor