Ranjan Varma

This is part 3 of my posts on Asset Allocation. New readers, see Part 1 & Part 2. Part 1 and 2 were about why Asset Allocation is a good idea and what’s it all about. I tried to relate it to the institution of marriage to articulate my thoughts.

The previous posts were theory, this is practical, the tangible part. Understanding a few things about asset allocation doesn’t really help. It helps only when you are able to apply that understanding. So what are the take aways from this knowledge of asset allocation? Let’s take it in steps.

Step 1: Understand Yourself

There’s always a risk-return trade off.  You must know whether you can absorb the shocks of short term losses when you aim at higher returns. It’s not possible that you want attractive returns and you are not exposed to a few shocks here and there. So be aware of your risk profile to start with. The three broad categories of risk profile are: Aggressive, Moderate and Conservative. Which one is your risk profile?

Step 2: Understand the Asset Classes

Sumi ( comment to my previous post) says that “we must invest in assets we understand. Blindly investing in any of them could be disastrous especially equity”. That’s so true. So one should know what options are available under equity & debt assets and then take a reality check on our comfort level with them. I’ll share my thoughts on Debt and Equity Asset classes in a future post. But let me share the link to some of the options available 

Step 3: Decide your allocation ratio

Now you knew the thumb rule that if your age is X, invest X% in debt and 100-X% in equity. Example, if you are a 25 year old guy, invest 25% in debt and 75% in equity. But after going through steps 1 & 2, it’s time you set a allocation ratio for yourself. Remember it’s personal, personal finance.

Step 4: Balance the Portfolio

We need to monitor the portfolio and rebalance it to the original allocation ratio. Why? Well, once you have invested (for example) Rs 1,00,000 , Rs 50,000 in equity and Rs 50,000 in debt funds the portfolio will change it’s ratio over time. In a few months, the equity portfolio may be valued at Rs 75,000 and debt portfolio at Rs 55,000 , total Rs 1,30,000. (just an example). So if you want to maintain your asset allocation ratio of 50% each, you may have to sell Rs10000 from your equity and invest the same in debt to make them valued at Rs 65,000 each.

By maintaining this asset allocation ratio, you are booking profits when the equity markets rise. Similarly, you are buying more equity when the stocks go down. This is what many experts do. So, by just maintaining your asset allocation ratio, you have become an expert!!

So there, I have made you into an expert. But despite this, there are people who after listening to all this, look at me with a befuddled look and say, “Now what should I do?”

I take a deep breath before I say, “Go to Hell”. “See, this is what I have done for myself. You can try that for yourself. But remember to do the step 1 & 4 for sure. And there’s the disclaimer…..”

तमसो मा ज्योतिर्गमयः|; Sharing is Caring!The purpose of this blog is to improve the way Indians manage their money and improve their knowledge about personal finance. We are living in a world which is increasingly becoming smaller and information is being shared at lighting fast pace.

However it still remains a mystery as how less we know about personal finance. The only solution is to share whatever useful stuff you find.

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