Asset allocation is integral to financial planning. However, investors are often unsure what it means. Let’s understand why asset allocation enables you to manage the risk of losing money rather than increasing returns.
Suppose you have a target of ₹1 crore to meet your child’s education after 15 years and you can save ₹25,000 every month for this purpose. Then, in this case, you will need an 8.3% return annually. This return will define if you need to take a high or low risk. Also, while you might need to take risks, you might not have the loss tolerance defined by the maximum amount of uncertainty one can accept.
