Asset allocation is an immensely crucial part of investment planning. It basically involves bifurcating your investment portfolio among various classes of assets, including bonds, stocks, and cash.
Nevertheless, asset allocation through mutual funds is a popular way of diversifying investments across multiple assets. In this article, we will discuss a few things that you need to know about allocating assets via mutual funds. Please keep reading until the end of the article to know more and make an informed decision.
Let’s dive in!
Determine Your Investment Goals and Risk Tolerance
Before you commence your journey of investing in hybrid funds, it is crucial to determine your risk tolerance and investment goals. Risk tolerance refers to your willingness to tolerate the stock market’s volatility. Meanwhile, investment goals refer to what you desire to achieve with your investments.
Remember, the higher your risk tolerance, the more aggressive your investment strategy will become. So, you should take good care while determining the same.
Choose Your Asset Allocation Strategy
Once you have determined your investment goals and risk tolerance, you need to choose an asset allocation strategy that suits your requirements. Some of the most common asset allocation strategies are:
This strategy requires you to invest a balanced portfolio in both stocks and fixed-income securities. This option is best for those with a moderate risk tolerance and searching for income generation.
This allocation strategy involves investing a higher percentage of your portfolio in fixed-income securities. It typically includes cash and bonds and is best suitable for investors with a low-risk tolerance.
This strategy involves investing a higher percentage of your portfolio within stocks and a significantly lower percentage in fixed-income securities. It is an ideal option for those investors with high-risk tolerance who are looking for capital appreciation.
Pick Out the Appropriate Mutual Funds
After you have determined your asset allocation strategy, you need to choose the appropriate equity funds that fit your strategy. Remember that mutual funds are widely available for all asset classes, including bonds, stocks, and cash. You will also come across mutual funds that invest in a combination of asset classes, typically known as balanced funds.
While choosing mutual funds, you should consider certain factors like additional fees and expenses, fund performance, investment style, etc. You should also look for mutual funds with a track record of consistent performance over a long period.
Nevertheless, choosing Edelweiss mutual funds will be the wisest option as it comes with extremely low fees and expenses. In a nutshell, their no-load mutual funds have less than 1% expense ratios and don’t charge commissions or upfront fees.
Diversify Your Mutual Fund Investments
Diversification is regarded as a crucial aspect of investing. It involves spreading your investments across multiple asset classes and securities to reduce your portfolio’s overall risk.
However, mutual funds offer built-in diversification by investing in a plethora of securities across multiple asset classes. Therefore, it’s imperative to diversify your mutual fund investments by investing in different types of mutual funds.
Monitor Your Portfolio and Rebalance Whenever Required
After you have invested in SIP or any other mutual fund option, you should monitor your portfolio regularly. Also, you need to rebalance it as and whenever required.
Over time, your asset allocation might considerably shift due to market fluctuations. Therefore, you might need to rebalance your portfolio only to ensure that it remains aligned with your investment goals.
Remember, rebalancing involves selling all the mutual fund holdings that have performed well all this while. Also, purchasing those who have underperformed and brought your portfolio in line with your target asset allocation.
You can rebalance your portfolio at regular intervals as per your requirements. Nevertheless, avoiding over-balancing is crucial since frequent rebalancing might result in unnecessary taxes and trading fees.
Obtain Professional Advice
Investing in mutual funds can be complicated, so you may feel uncertain or overwhelmed. If you need more confidence about allocating your assets effectively, then you can seek professional advice.
You can consider talking to your financial advisor, and they will help you determine your investment goals. They will also recommend the best allocation strategy and pick out the best debt funds that align with your requirements.
Allocating assets via mutual funds is truly an effective way to diversify your investments and achieve your investment goals. Even though investing in mutual funds involves certain risks, careful planning and a disciplined approach can help you earn higher returns.
You can also consider investing in Edelweiss hybrid funds to balance out your investments. However, you should remember to do your due diligence, research, and seek professional advice if and when required before investing.