Experts who give investment advice always say that you should never put all of your money into one asset. According to him, investors should invest their money in a variety of ways, ranging from stocks to gold, depending on their risk tolerance.
Now the question is, on what basis should an investor invest his money in all of these assets in order to minimize risk while maximizing return? According to research someone has provided information on assets, asset allocation, and investment methodology in this document. You’ve also read and mastered how to correctly invest your money.
What is Asset Allocation in Investment?
Asset allocation refers to how much of your investment money is placed in a certain asset, such as equity, gold, debt, or real estate, and how much of your money is in cash, which you can spend when you need it or invest in a specific asset. The ultimate goal of asset allocation is to minimize investing risk while maximizing returns on your money.
What are the characteristics of different assets?
According to research, each asset has its own risks and returns. Like equities can get very high growth and dividend income, and can be cashed out quickly. However, the risk is also very high in this. You can invest in it through stocks and MFs.
On the other hand, gold and debt are more safe investment options, although they do not earn as fast as equities and early cashing of investments in debt can affect the returns. Investment in these assets can be done through stocks, FDs, mutual funds, ETFs etc.
What is Exact Formula of Investment?
According to Research, asset allocation is dependent on your risk appetite, which simply indicates how long you are willing to leave your investment so that you are not affected by tiny ups and downs. To put it another way, what is your investment time goal? You can use the algorithm below to allocate your assets.
1 to 3 years Investment Plans
If you believe this money will be needed in the next one to three years, such as for a wedding, children’s schooling, or any other large expense, it’s best to maintain 95% of it in debt and invest 5% in gold. Keep your distance from equity. Because it might take years to recover from a stock market crash, even if they cover your whole loss in the process.
3 to 5 years Investment Plans
If you believe you will not need money for the next three years but may need to extract money after that, invest 40% of your money in stock, 50% in debt, and 10% in gold.
5 to 8 years Investment Plans
For a time period of 5 to 8 years, it is preferable to expand your equity investment to 55 percent. Spend 30% of your money on debt and 15% on gold.
More than 8 years Investment Plans
You should take more risk if you can leave your money to grow in the market for more than 8 years. In reality, getting extremely high returns in the market when there is a lot of volatility is normal. In the last ten years, the Sensex has increased nearly thrice. Maintain a 15% gold allocation for more than 8 years, and invest the remainder in debt.