In my previous articles, I have been writing about power of compounding, benefits of long term investing, fixed deposit or equities, impact of inflation and future value of money. I am sure a lot of it is read and understood, yet there are thousands of doubts in the mind with respect to investing for wealth creation and financial independence and managing various goals.
This article is an attempt to make it simpler to plan and help you reach your goals and attain financial independence.
All of us have these questions in our mind, how much of investments is good enough in equity mutual funds? Should I invest in something else? How much fixed deposits are good to have? Should I invest in real estate? Should I invest in stocks directly? Is this investment doing good? Should I shift it to any other fund / Asset class?
Answers to these questions depend more on various factors like your age, your income vs expenses levels, your goals, your life stage and the number of years in hand for the investments to grow and less on whether the asset class is currently hot buy or not.
Before we go further let’s understand what is asset allocation and diversification.
Imagine, if you are going on a holiday travel, usually, what you do is to distribute money / important items into different bags / wallets / Shirt Pockets. Isn’t it? If you are travelling abroad, usually u carry a pair of extra clothes & currency in hand baggage and rest into check-in baggage. Why do we do this? We do this for two reasons, one to manage risk of losing one baggage with everything in it and two, to ensure basic necessities are met (Safety) in case of any untoward incident.
In simple terms, this is what asset allocation & diversification means. It basically means distributing the savings as per the risk factors & safety needs keeping wealth creation in mind.
In Investments / Wealth Creation, Asset allocation means distributing your investments between various asset classes available such as Fixed Deposits / Debt MFs, Equity MF / Direct Stocks, Real Estate, Currency / Gold / Commodities.
Diversification is within each asset class the kind of businesses you want to invest in depending on the risk / fluctuations in returns / liquidity parameters.
If you have observed, all the asset classes are not top performers at all the times. There will be a phase where each of these asset classes give better returns than the others. Every asset class has its own time cycle of Over & Under Performances.
In my view, the asset allocation & diversification depends more on your Goals and time in hand and your ability to manage Risk & Needs and remain patient with your investment choices.
Keeping this in mind, the asset allocation & diversification that one could choose can be as below:
Having understood the framework, still we will have this doubt as to which fund to choose, is it right fund or not, how many funds to invest into etc.?
To answer these questions, entrust your investment decisions to a good financial advisor, whose only motto is to make you understand the benefits of staying put with an investment and walk with you in your journey to financial independence. He / She has expertise in the subject and help you to understand all the perspectives of choosing an investment option.