5 Reasons Why Asset Allocation Is Important For Your Financial Goals In 2023

You need to set very clear financial goals to achieve big in your personal life and business. A sound investment strategy will help you move towards the set goals. Asset allocation wisely. Optimal allocation will help develop a strong investment portfolio and give you lots of confidence to move ahead.

About Asset Allocation

It involves the distribution of excess investments across diverse asset classes like real estate, gold, debt, and equity as well as holding cash. It helps balance portfolio rewards and risks.  For this, it takes into account your financial goals, investment time horizon, and risk profile.

Benefits derived in 2023

1. Reduces risks:

You should make decisions on future investments based on your risk taking ability or past investment experiences. In case you have earned big from equities, then you are likely to invest in it quite aggressively. Otherwise, you might become conservative enough to make investments in fixed-income instruments only if you had suffered losses earlier in equity markets. The latter includes recurring deposits, fixed deposits, etc. Thus, past experiences have a greater say on your present actions, especially finance is concerned. Hence, you are to implement the appropriate allocation of assets to achieve desired financial goals. It helps reduce investment risks while infusing certainty in achieving the objectives.

2. Optimal return:

Without allocating your assets properly, chances are you will invest in an unplanned manner. Thus, you will find it difficult to determine if investment returns derived is enough to achieve long and short term financial goals. Also, you may lose on tax return. Some investors can be found to be excessively conservative or aggressive in their investment patterns. It is for this reason, they fail to earn better returns as expected. However, by allocating assets, you will be able to determine the amount you can expect as returns on all your investments. Also, potential risks can be minimized.

3. Investments should be aligned considering the time horizon:

Time horizon should also be accounted for besides risk profile to determine your asset allocation. The former is likely to determine the type of asset class to invest in including equity markets. A longer time horizon set for financial goals will enable you to allocate your assets less toward debt and more toward equity. For the short-term, the latter is risky, but fine for long-term investments as it can get plenty of time to recover from different turbulent phases. Although debt involves fewer risks, returns offered are quite low to beat inflation. Hence, your investment strategy should have the right mix of cash-based, real estate, gold, debt, and equity.

4. Adequate liquidity:

When making investment-related decisions, liquidity is a major factor to consider. Some investments are offered with a certain lock-in period. This means, during this period, you will not be able to redeem it to overcome emergency situations. ELSS mutual fund (Equity-Linked Saving Scheme) and PPF (Public Provident Fund) are some types of investments that cannot be taken out before a fixed time period. If you need money for emergencies, then these are not the options to choose. If you do, you will require a sufficient amount of liquidity to meet your financial goals when needed. However, such investment schemes offer good tax return.

5. Reduce taxes:

You might belong to a high-income bracket. You may want to ensure your hard-earned money is safe and resort to investing it in fixed deposits. Doing so will only mean you will end up paying more taxes. It is possible to save that money legitimately! Hence, you should allocate your assets keeping in mind the tax you need to pay on the income gained.

It will not be an easy task to ensure optimal Asset Allocation. There are lots of factors to be taken into consideration to make the right approach. But once achieved, you will be able to reduce your taxes, and risks and earn better returns.