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What is Asset Allocation-VRK100-14Oct2012

What is Asset Allocation-VRK100-14Oct2012

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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 ofinvestible surplus money into various asset classes,such as equities, commodities, bonds, or real estate.The purpose of asset allocation is to achieve aninvestor’s objectives from investments and tomoderate investment risks.
 
Let us assume an individual investor has $ 1,000,000of available funds to invest in some asset classes.She has to make a decision regarding the asset mix –how much amount to put in equities, how much inbonds or commodities or how much in other assetclasses. While deciding the asset mix, she needs tokeep in mind her investment goals, her risk appetite,time period of investments, tax concerns and herpersonal situation.
 
Institutional investors also, more or less, follow asimilar approach though institutional investors havelarger resources, their investment universe is bigger,they have higher regulatory hurdles, and they haveboth assets 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 onthe asset allocation, the following aspects need tobe examined thoroughly:
 
 
 
1. Risk tolerance – the ability and willingness to takerisk
 
2. Expected return the expected return from theproposed investments
 
3. Liquidity needs any requirement for cash in thenear term
 
4. Tax concerns – tax concessions, if any or theinvestor’s tax bracket
 
5. Personal situation e.g., an investor has no timeor expertise
 
6. Time horizon investment’s time period like, oneyear, 5 years or more
 
There are several types of asset allocation. Strategicasset allocation (SAA) involves specifying aninvestor’s long-term return objectives, depending oninvestor’s ability & willingness to take risk, marketexpectations and investment constraints.
 
Another major type of asset allocation is tacticalasset allocation, which focuses on making short-termchanges to weights of asset classes based on short-term view on market performance of selected assetclasses.
Related:Understanding Asset Allocation 14Oct2012
 
Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is forinformation purposes only and should not be taken as investment advice. Investors are advised to consulttheir financial advisor before taking any investment decisions. He blogs at:

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