Asset allocation

All savings will finally get converted into an asset; these are of four types Equity, Real Estate, Gold and Silver and Fixed income instruments. The assets portfolio will consist of these four, all of them have some characteristics like ease of liquidity or absence of it, positive or negative correlation with each other and risk associated with them. Within fixed income instruments also higher interests may be offered as returns but beyond a point the capital itself will be at risk. All of these assets have already been discussed in my earlier blogs which are available for reference  

Thus there is a need to optimize the allocation for these assets and balance it once in a while.Asset allocation needs to be balanced to suit your age and life position and situation too.

 Even if you were to make an asset allocation there are constrains which will not make it practical for small amounts of savings to be invested in assets like real estate or even precious metals. You need to understand the characteristics of these assets well in order to make timely switches and build your desired portfolio to become wealthy and achieve financial freedom, which, to me, seems like a worth a while aim and aspiration. Earlier you achieve it more time you have on hand to do what you enjoy and like without worrying about the monetary returns from your activities which then become immaterial.

Journey to this aim through assets allocation is an interesting one and enjoyable too. Initially when your savings are small, you can use fixed income instruments and equity to grow the savings at a rate higher than inflation. When you build a little kitty good enough to serve as your margin money for your first house, you can take a housing loan and pay EMIs instead of monthly rentals.

Before you do these don’t forget to build your emergency fund which can be roughly equal to six months of your monthly expenditure and it must be liquid and available easily.

As regards precious metals these are recommended to be about 10% of your net worth or total assets.

In the long term the assets which help to build your net worth and wealth are likely to be Real Estate and Equity.Level at which you aim for your Financial Freedom will depend on your needs and life style; everyone has to define this Financial Goal for himself.

There is no asset which always appreciates or depreciates but over a longer period equity serves the purpose and depending on your choice of real estate that asset can complement too.

This is my last blog in this series on Personal Financial Management. I thank all the readers who read it and tried to benefit from it.I am happy I could write one every week regularly and complete the task. Now it will be available as reference material for the future.

Any questions or queries are welcome on my email id prakunda@yahoo.co.in. I plan to now write randomly on different topics as and when I think of one and get down to write.