Successful investments are all about balancing risks and rewards. To do so, one has to allocate funds optimally among different asset classes (equity, debt, gold, and cash). In fact, diversified fund allocation is the quintessence of a healthy investment portfolio to beat volatility and create wealth.

Eight months into 2022, and the capital markets have put up quite a contrasting show. Equities are up only 1% year-to-date as on August 25; the Russia-Ukraine conflict and high crude oil prices have eroded investors’ wealth. In the debt space, rise in yields due to inflation and rate hikes by the Reserve Bank of India have made short-term funds more attractive than the long-term ones. Gold, too, has had its share of dull and bright phases. How can an investor handle such volatility? Via asset allocation. Let us see how it works.

Winners change over time

Wide performance swings over the past decade prove that asset returns and rankings vary from year to year. No asset class outperforms at any point of time. The idea is not to chase winners and losers, but to diversify allocation to have a bit of all.

Hence, asset allocate

Investors should allocate their money across the investment avenues to get the best out of all. Asset allocation by definition refers to apportioning funds across asset classes to maximise returns and reduce risks. For instance, while equities possesses growth potential, debt offers stability. Thus, underperformance or non-performance of one asset class can be evened out by others, thereby applying brakes on the downside.