: 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