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The document discusses asset allocation as a key investment strategy that distributes financial resources across various asset classes to balance risk and return. It highlights the importance of diversification, inflation protection, and liquidity management, as well as key asset classes such as equities, bonds, real estate, gold, and cash. A sample balanced portfolio is provided, illustrating how to achieve growth while maintaining stability and liquidity.

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5 views2 pages

Ia Individual

The document discusses asset allocation as a key investment strategy that distributes financial resources across various asset classes to balance risk and return. It highlights the importance of diversification, inflation protection, and liquidity management, as well as key asset classes such as equities, bonds, real estate, gold, and cash. A sample balanced portfolio is provided, illustrating how to achieve growth while maintaining stability and liquidity.

Uploaded by

Yamuna
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Yamunambiga TYBFM_064 IA_SEM - VI

Asset Allocation & Portfolio Structure

Asset allocation is a fundamental investment strategy that involves distributing financial


resources across different asset classes to balance risk and return. The goal is to achieve
financial objectives while minimizing potential losses due to market fluctuations. This report
provides a detailed insight into the importance of asset allocation, the key asset classes, and
how a well-structured portfolio ensures financial stability and growth.

Importance of Asset Allocation

Asset allocation is crucial for investors as it helps in risk diversification, inflation protection,
and liquidity management. A well-balanced investment portfolio reduces the overall impact
of market volatility by spreading investments across multiple asset classes. Key benefits of
asset allocation include:

 Risk Diversification: By investing in different asset classes, investors reduce their


exposure to the risks associated with a single investment type.
 Inflation Protection: Some asset classes, such as equities and real estate, provide long-
term appreciation that outpaces inflation.
 Market Volatility Management: A diversified portfolio balances the high-risk nature of
stocks with the stability of bonds and cash equivalents.
 Liquidity & Security: Maintaining a mix of liquid assets ensures financial preparedness
for unforeseen circumstances.

Key Asset Classes in Asset Allocation

A well-diversified portfolio consists of multiple asset classes, each offering unique risk and
return characteristics. The key asset classes include:

1. Equities (Stocks)

Equities represent ownership in companies and provide investors with returns through capital
appreciation and dividends. The stock market has historically provided 12-15% annualized
returns, making equities an essential component for long-term growth. However, equities
come with high volatility, requiring strategic investment planning.

2. Bonds & Fixed Income

Bonds and fixed-income securities provide stable returns with lower risk compared to stocks.
These include government bonds, corporate bonds, and fixed deposits. Fixed-income
investments ensure capital preservation and offer predictable income, making them ideal for
conservative investors.

3. Real Estate

Real estate investments provide long-term value appreciation and serve as an effective hedge
against inflation. Investors can opt for direct property investments or Real Estate
Investment Trusts (REITs) to gain exposure to this asset class. While real estate
investments are relatively illiquid, they offer significant growth potential over time.
Yamunambiga TYBFM_064 IA_SEM - VI

4. Gold & Commodities

Gold has historically been a safe-haven investment, particularly in India, where it is also
culturally significant. It acts as a store of value and a hedge against economic uncertainties.
Other commodities, such as silver, oil, and agricultural products, can further diversify the
portfolio.

5. Cash & Cash Equivalents

Cash and cash equivalents, including savings accounts, liquid mutual funds, and short-
term deposits, provide immediate liquidity. While they offer lower returns, they play a
crucial role in managing short-term financial needs and emergency funds.

Building a Balanced Portfolio

A well-structured portfolio considers financial goals, risk tolerance, and investment horizon.
An example of a diversified portfolio for a moderate investor with a total investment of
₹50,00,000 would be:

 Equities (50%) – ₹25,00,000


 Bonds (25%) – ₹12,50,000
 Real Estate (10%) – ₹5,00,000
 Gold (10%) – ₹5,00,000
 Cash (5%) – ₹2,50,000

This allocation ensures growth potential while maintaining stability and liquidity. Periodic
rebalancing is necessary to align investments with changing financial goals and market
conditions.

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