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Tips on optimising asset allocation in your portfolio

Mutual fund
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Asset allocation involves dividing a portfolio among asset classes, such as stocks, bonds, and cash equivalents. The main aim is to manage risks and optimise return potential by diversifying across asset classes, each of which responds differently to market conditions.

Such a diversified portfolio typically includes equity and debt. It can also include other asset classes, such as commodities or real estate investment trusts and infrastructure investment trusts. Asset allocation can be achieved within a single scheme – such as various hybrid mutual funds that invest in both debt and equity – or by investing in different types of schemes.

  • Table of contents
  1. Why is asset allocation important for portfolio management?
  2. Factors to consider while diversifying across asset classes
  3. Asset allocation approaches

Why is asset allocation important for portfolio management?

Diversified asset allocation is important when investing for the following reasons:

  • Risk mitigation: By investing in a mix of stocks, bonds, real estate, and other assets, investors can reduce the impact of poor performance in any single asset class on their portfolio.
  • Optimized returns: As different asset classes typically respond differently to market conditions, diversification allows investors to capture the positive performance of some of these assets while reducing the impact of the negative performance of others. This can add relative stability to a portfolio.
  • Hedging against market uncertainty: Diversified asset allocation can act as a hedge against volatility.
  • Portfolio alignment: Asset allocation can help create a portfolio that is aligned with the investor’s goals, risk appetite, and investment horizon. For example, long-term goals may require a more aggressive approach with a high percentage of equities and some debt. A conservative strategy with more bonds or money market instruments may be more appropriate for short-term goals or for investors with lower risk tolerance.

Factors to consider while diversifying across asset classes:

  • Risk tolerance: This refers to how comfortable an individual is with fluctuations in the value of their portfolio in response to market movements. Investors with a high risk appetite are more comfortable with these fluctuations and are willing to accept the risk of loss if it means they get higher return potential. Conservative investors with a low risk appetite, meanwhile, prioritise relative stability over return potential.  
  • Investment goals: This involves identifying short-term and long-term financial objectives that would influence the right asset allocation in a portfolio.
  • Time horizon: Evaluate the time you have to achieve investment goals. Longer time horizons could allow for riskier investments, while shorter ones may require relatively lower-risk avenues. 
  • Market conditions: Involves assessing economic conditions and market trends to guide asset allocation decisions.

Some asset allocation approaches:

  • Strategic asset allocation: This investment strategy involves deciding how much of your money will be invested in equity and how much in debt or other asset classes, based on your risk appetite, goals and investment horizon. It is a long-term view on asset allocation that requires periodic rebalancing to ensure that the balance between the assets is maintained. This approach focuses on staying disciplined about your investments, irrespective of the market condition.
  • Tactical asset allocation: This allocation style involves making short-term adjustments to a base asset allocation pattern to leverage different market conditions. These changes could be made to make gains in certain scenarios or mitigate risks. Investors need to know how to track and understand market movements for such a strategy.
  • Dynamic asset allocation: This investment strategy involves regularly adjusting the asset allocation pattern based on market trends. While tactical allocation requires short-term changes, dynamic allocation involves a constantly evolving asset class mix.


Asset allocation is an important aspect of investing. It helps balance risk and return potential and create a robust portfolio that aligns with your financial goals, risk tolerance and investment horizon. You can diversify across asset classes by investing in hybrid mutual funds or choosing different equity and debt schemes based on your investment goals. It is always recommended that you consult a financial advisor when making investment decisions.


Why is asset allocation important?
Diversified asset allocation helps balance risk and return potential and align investments with your financial goals, risk tolerance, and time horizon.

Can asset allocation help mitigate investment risk?
Asset allocation can potentially reduce investment risk by spreading investments across different types of assets, which can reduce the impact of underperformance in a single asset class.

Is there a specific asset allocation strategy suitable for all investors?
There isn't a particular asset allocation strategy that fits everyone. The optimum strategy depends on a person's risk tolerance, investment goals, time horizon, and market conditions.

What are some common mistakes to avoid when implementing asset allocation?
Common mistakes can be inadequate diversification, over diversification or choosing an allocation pattern that does not align with your risk appetite and return expectations.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.