Decoding importance of asset allocation in investing — Key factors that guide it

According to Guha, asset allocation matters significantly in the realm of investment management. It refers to the process of distributing an investment portfolio across different asset classes, such as equities, fixed income, real estate, and cash equivalents. The goal of asset allocation is to strike a balance between risk and reward while optimizing returns based on an individual's financial objectives. Guha emphasised that by diversifying investments across various asset classes, investors can potentially minimise risk and maximize returns over the long term.

Guha highlighted two essential components of asset allocation: strategic allocation and tactical positioning. Strategic allocation involves determining the long-term allocation of investments based on factors like risk tolerance, investment horizon, and financial goals. It sets the foundation for the portfolio and provides a broad framework for asset allocation decisions.

On the other hand, tactical positioning refers to the short-term adjustments made within the strategic allocation framework to capitalise on market opportunities or mitigate risks. It involves monitoring market trends, economic indicators, and other relevant factors to make timely adjustments to the portfolio's asset allocation. By combining strategic allocation with tactical positioning, investors can adapt their portfolios to changing market conditions and potentially enhance investment outcomes.

Anupam Guha emphasised that asset allocation decisions should be guided by three crucial factors: risk appetite, return expectations, and liquidity needs.