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Money Money Money: Experts explain the importance of asset allocation

By Surabhi Upadhyay

Asset allocation is a crucial part of any financial plan and having the right mix of debt and equity is a key element on which your portfolio rests. While asset allocation can be done by using separate instruments for fixed income and equity, the market also offers hybrid funds that promise to give investors the best of both worlds.

Hybrid funds combine the compounding potential of equity assets with the relative stability of debt assets. Manoj Nagpal, MD and CEO of Outlook Asia Capital, and Ankur Maheshwari, CEO of Equirus Wealth Management, talk to CNBC-TV18 about these funds and their relevance in your portfolio.

According to Nagpal, every investor has to first think about asset allocation and risk tolerance. "The most common thumb rule, known as age-based thumb rule, is 100 minus your age, which should be the proportion to equities. A variation is 120 minus your age as your working life starts around 20. So, when your age is 20, it should be 120 minus 20, so 100 percent allocation to equities. It is the most commonly followed rule across categories when you do not want to go into individual risk allocation," he said.

Maheshwari stressed the importance of constant re-balancing and monitoring. "Asset allocation is the most fundamental principle that one has to follow when you start building a portfolio. But investors start off with a ratio and later fail to maintain it owing to lack of discipline. One may start with a 65:35 equity: debt, but due to market movements, obviously it is bound to get tweaked. If equity does well, that number will become higher and so on and so forth. So it needs constant monitoring, constant rebalancing," he noted.

The other rule is goal-based asset allocation where one divides the goals into short term, medium term and long term goals.