Chapter 2 of 4

Asset allocation

8 min read

Asset allocation is how you divide your money between asset classes such as equity, debt and gold. Over long periods it explains much of the difference in how portfolios behave.

What each asset does

Equity: the main engine of long-term growth, with large swings.
Debt: stability and income, with lower growth.
Gold: often a hedge during stress and against inflation, though it produces no income.
Cash: safety and flexibility for near-term needs.

Allocate by goal, not by mood

Goals under three years away: mostly debt and cash.
Goals three to seven years away: a mix, shifting toward safer assets as the date nears.
Goals more than seven years away: a larger equity share, because there is time to recover from falls.

Rebalancing

Markets drift your allocation away from the plan. Rebalancing brings it back, which also forces you to buy what has fallen and trim what has risen.

A rebalance (illustrative)

You hold ₹10 lakh: ₹6 lakh in equity and ₹4 lakh in debt, a 60/40 plan.
Equity falls 20% to ₹4.8 lakh while debt stays at ₹4 lakh. The total is ₹8.8 lakh and equity is only about 55%.
To restore 60%, equity should be ₹5.28 lakh, so you move about ₹0.48 lakh from debt to equity.

Key takeaways

Allocation across equity, debt and gold drives much of your portfolio's behaviour.
Shorter goals need safer assets.
Rebalance on a schedule, not on emotion.

This content is for education only and is not investment or tax advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.