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Speed Read: What is Asset Allocation?

Speed Read: What is Asset Allocation?

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Asset allocation is explained in a simple way by RamaKrishna Vadlamudi, Hyderabad.
Asset allocation is explained in a simple way by RamaKrishna Vadlamudi, Hyderabad.

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Published by: RamaKrishna Vadlamudi on Oct 03, 2013
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05/15/2014

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Speed Read 
: What is Asset Allocation?
Simply put, asset allocation is distribution of investible surplus money into various assetclasses, such as equities, commodities, bonds,or real estate. The purpose of asset allocationis to achieve an investor’s objectives frominvestments and to moderate investment risks.Let us assume an individual investor has $1,000,000 of available funds to invest in someasset classes. She has to make a decisionregarding the asset mix – how much amount toput in equities, how much in bonds orcommodities or how much in other assetclasses. While deciding the asset mix, sheneeds to keep in mind her investment goals,her risk appetite, time period of investments,tax concerns and her personal situation.Institutional investors also, more or less, followa similar approach though institutionalinvestors have larger resources, theirinvestment universe is bigger, they havehigher regulatory hurdles, and they have bothassets and liabilities to take care of moreseriously.Asset allocation is not static, it is a dynamicprocess. It is an important part of an investor’sportfolio management process. Before deciding
 
on the asset allocation, the following aspectsneed to be examined thoroughly:1. Risk tolerance the ability and willingness totake risk2. Expected return – the expected return fromthe proposed investments3. Liquidity needs any requirement for cash inthe near term4. Tax concerns tax concessions, if any or theinvestor’s tax bracket5. Personal situation – e.g., an investor has notime or expertise6. Time horizon investment’s time period like,one year, 5 years or more There are several types of asset allocation.Strategic asset allocation (SAA) involvesspecifying an investors long-term returnobjectives, depending on investor’s ability &willingness to take risk, market expectationsand investment constraints.Another major type of asset allocation istactical asset allocation, which focuses onmaking short-term changes to weights of assetclasses based on short-term view on marketperformance of selected asset classes.

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