Let’s Talk Money: The importance of asset allocation in investments

Asset allocation plays a crucial role in building a strong investment portfolio. Many investors tend to overlook this strategy when stock markets are performing well. However, the past six months have highlighted the significance of diversifying investments across different asset classes. While equity funds have struggled, assets like gold and certain debt funds have performed well, proving the need for a balanced approach.

Discussing this on CNBC-TV18, experts Mohit Gang, Founder and CEO of Moneyfront, and Ihab Dalwai, Senior Fund Manager at ICICI Prudential AMC, shared valuable insights on the subject.

Gang emphasised that financial experts have always stressed the importance of maintaining a balanced portfolio. He noted, “Once you get carried away in a market frenzy, you tend to ignore the fundamental principles of finance.”Also Read | How investing in private credit fund is different from investing in an unlisted bond

He pointed out that a well-diversified portfolio consisting of equities, debt funds, and commodities like gold and silver could yield superior risk-adjusted returns. A portfolio split such as 60:40 in equity and debt or even a 50:30:20 mix of equity, debt, and commodities would have provided better results than a pure equity portfolio over the past year.

Dalwai further explained that different asset classes perform differently in various market phases. Looking at a 10-year data set, he noted, debt has been the best performer two times out of ten, equity three to four times, and gold has also had its moments of success.

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While equity generally performs well in the long run, he advised that investors should periodically book profits and reallocate funds to other asset classes. This strategy helps in capitalising on market cycles and mitigating risks.

For more, watch the accompanying video