Asset allocation refers to diversification of your investment portfolio across different asset classes, e.g. equity, debt, gold etc. Asset allocation aims to balance risk and returns based on your risk appetite, investment tenure and financial goals.
Different asset classes outperform / underperform each other in different market conditions; without rebalancing, your asset allocation can deviate significantly from your target allocation.
In the chart below, we have shown how the asset allocation of a portfolio comprising of 50% equity and 50% debt (at the beginning of 2011) would change over the next 10 years without rebalancing. You can see that without rebalancing your equity allocation was well below 50% in the first 3 years and is above 50% for the last 4 years. Asset rebalancing is therefore, required from time to time to bring asset allocation back to the target. Asset rebalancing reduces downside risks in volatile markets and may potentially give superior risk adjusted returns.
Your ideal or target depends on a number of factors:
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