KNOWLEDGE CENTRE Financial Planning / What Is Strategic Asset Allocation And Its Advantages?
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What Is Strategic Asset Allocation And Its Advantages?


Your financial plan is all about a trade-off between risk and returns. Not just that you also need to impute liquidity needs and tax considerations. Equity offers you tax efficiency and long-term wealth creation. On the other hand, debt offers you stability and regular income.

Strategic asset allocation involves diversifying your investments across different investment groups such as equity and debt, and changing the weightage of these allocations according to changes in certain factors such as the amount of risk you’re willing to take, your income creation sources, the amount of liquidity you require, and the taxes applicable on your income/investments.

What Are The Benefits Of Strategic Asset Allocation?

The benefit of asset allocation is that it evolves your financial plan by taking into account your situation as well as the external market conditions. This helps you to assess the performance of your individual investments, and then tweak them so that you remain on track to achieve your targets.

How Can You Maintain A Strategic Asset Allocation Between Equity And Debt?

How you strike the right mix between equity and debt will essentially depend on 4 factors:

1. What is your risk appetite currently and how will it evolve?
2. How will your wealth creation needs change at different phases?
3. How will your need for cash in hand change over time?
4. How will taxes affect your financial plan?

Let’s look at these points in more details:

  1. What Is Your Risk Appetite Currently And How Will It Evolve?

    This is a very important question you need to ask yourself. When you are in your mid-twenties to your mid-thirties, your risk appetite is much higher compared to a 50-year-old person. When you are younger, you should allocate more to equity and less to debt. As your age progresses, at regular intervals you should be reducing your equity exposure and increasing your debt exposure. The crux of the story is that your mutual fund investments should be made while keeping your risk tolerance in mind.

  2. How Will Your Wealth Creation Needs Change At Different Phases?

    If you are looking at a larger corpus in long-term towards your retirement, children’s education, children’s marriage etc., then you must have a larger allocation to equities. Equities are risky in the short run. However, if you hold quality equity funds for a longer tenure, then empirical evidence shows that equities have vastly outperformed other asset classes in the long term. Further power of compounding ensures higher wealth generation through equity over a long term.

  3. How Will Your Need For Cash In Hand Change Over Time?

    How exactly does liquidity determine your debt/equity mix? If you need the funds back in 10 years then equity can be a good option. If you need the funds after 3 years then equity may be too risky and debt funds may be a better option. But, what if you need the funds in less than 1 year? In that case, even debt/income funds may not be advisable due to price volatility. You will be better off investing in liquid funds or liquid-plus fund.

  4. How Will Taxes Affect Your Financial Plan?

    When you plan for the long term the post-tax returns matter more than the pre-tax returns. If you are already paying high taxes on your income, your key priority will be to make your financial plan as tax-efficient as possible. Relatively equity is more tax efficient than debt. When it comes to equity funds, the dividends are entirely tax-free in your hands as are long-term capital gains (held for more than 1 year). Even short-term capital gains are taxed at a concessional rate of 15%. And if you want to add the Section 80C benefit, you can opt for ELSS funds which give you up to Rs. 1.5 lakhs in tax deductions. In case of debt, the dividend is tax-free but there is DDT to the extent of 28.33% on debt fund dividends. Additionally, short-term capital gains are taxed as per your income slab rate while LTCG is taxed at 20% after indexation. Equities are surely more tax smart.

If you want to learn more about identifying your goals and making the right investments to achieve them, then download our Angel Bee app today! With the help of your ARQ mutual fund investment engine, it analyses your goals and then recommends you the best equity/debt mutual funds that can help you achieve your dreams.


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