Asset allocation can be defined as an investment strategy through which one allocates his or her portfolio among various asset class like equity, commodities, cash etc….There are many approaches or strategies to asset allocation, let’s look at some of them –
1. 100 minus your age method – According to this method the percentage of one’s total investments in equities should be 100 less your present age that if your age is 20 years than you should invest 80 percent of your investment in equities and 20 percent in bonds or fixed yielding securities.
2. Financial objectives method – Under this method one should allocate his or her investments according to future financial needs, so if one expects in near future some expenditure then he or she should go for short term deposits so that expenditure can be met, However if one expects that there will be no near future expenditure, than one can go for long term investments.
3. Risk tolerance method – According to this method one should make the investments according to his or her risk taking capabilities, that if one is risk taker then he or she can go for equities, however one does not want to take any risk then he or she should invest in fixed income securities and stay away from stock markets.
4. Cash flow needs method – This method involves projecting future cash flows of an individual and estimating the deficit and then planning the investments accordingly.