New Delhi (India), May 2: Investing in a high-potential equity fund cannot guarantee high returns. You must regularly check if your equity fund investment aligns with your investment objectives and allocate your assets accordingly. Read on to know about the importance of asset allocation in equity funds.
What is asset allocation?
When an investor allocates their money across multiple asset classes like equity, fixed income, debt, and cash, they are practising asset allocation. You can reduce the overall risk associated with your investment portfolio by allocating money across assets. Another advantage of asset allocation is that it helps you reduce your net loss. Asset allocation, therefore, helps you earn better returns by reducing net losses and spreading overall risk across asset classes.
Why is asset allocation important when investing in equity funds?
Asset management is a key factor among all the factors affecting equity fund returns. Here are three reasons why asset allocation is important when you invest in equity funds :
· You can reduce the overall risk posed by equity funds by allocating your assets effectively: Equity funds pose a high risk to investors since they are impacted by market fluctuations. Your portfolio risk can range between moderate and very high depending on the type of equity fund you select. Small-cap equity funds, for instance, are highly volatile and pose a very high risk to investor. Asset allocation can help you reduce this risk significantly.
· Asset allocation helps you achieve your financial goals on time: Investors generally fix their financial goals before investing in any mutual fund scheme. However, oftentimes, despite having invested in the best mutual fund , you can end up straying away from your financial goals. Asset allocation helps you remain aligned with your financial objectives.
· You can optimise your equity fund returns through efficient asset allocation: You can achieve the perfect balance between risk and returns by allocating your assets efficiently.
How to practise effective asset allocation in equity fund investments?
Any investor who regularly assesses their equity funds to practise asset allocation must consider two important factors: their investment’s time horizon and their risk appetite. Here is how you can consider these two factors to allocate your assets effectively:
· Liquidity and time horizon generally go hand-in-hand: Certain investment options might offer high returns over a long term but have a lock-in period. If you wish to access your investment amount regularly, you can fix a shorter investment horizon. Having shorter investment horizons while investing in equity funds can help you regularly assess your investment portfolio and allocate assets according to your risk appetite.
· You must carefully assess your risk-taking capacity while investing: You must invest in an equity mutual fund only after carefully assessing your risk appetite. You must keep this rule in mind even while practising asset allocation. A good practise to follow is defining your investment objectives in advance and analysing your risk appetite accordingly.
You can use an online mutual fund return calculator to decide your investment amount and investment horizon after fixing your financial objectives.