I have come across individuals who ignore symptoms of bad financial health. In fact, many of them aren’t aware of it and assume they are in the pink of health financially.

• They do not have any whereabouts of their money

• Use credit cards for basic needs

• Have little savings

• Payoff debt with another

• Have a poor credit score

• Do not have rainy day fund in place

[Read in detail: 6 Symptoms Of Bad Financial Health]

Yet, these individuals believe they are on-track in the journey of wealth creation, accomplishing financial goals, and ultimately living a blissful retired life in the future. But they are wrong!

[Read: Step-by-step Approach To Retirement]

In the interest of your financial well-being, it is important that you have better control over your personal finance.

You must start living on a budget, curtail debt and imprudent spending, build a good credit history, set financial goals (short-term, long-term), and make prudent investment choices.

[Read: The 9 Thumb Rules To Achieving the Epitome of Financial Wellbeing]

When you invest, following a sensible strategy is important, whereby you can secure your financial future. Once you start living a financially healthy life it would add to your financial freedom.

[Read: 8 Key Lessons On Financial Freedom From ‘Rich Dad, Poor Dad’] 

A wise person is mindful of his financial health and will consider these six points before investing:

1. His/her current financial situation—income, personal and household expenses, assets, liabilities, etc.

2. Future career plans and aspirations

3. Risk profile

4. Investment objectives (growth, regular income or protection of principal)

5. Financial goals (buying a dream home, children’s future (their education and wedding expenses, retirement, and so on)

6. Number of years left before financial goal/s transpire

If you know the aspects, you can chart out your asset allocation—an investment strategy to build wealth

Asset allocation can help you optimize your portfolio’s returns with minimum risk involved. It ensures a balance between risk and return of any asset class.

Asset allocation means you are investing a certain percentage of your investible surplus in respective asset classes, such as equity, debt, gold and real estate to clock decent returns for you.

Ideally, as a thumb rule, the proportion of debt investment should be equal to your age. So, if you are a 30-year-old, 30% of the investible surplus can be parked in debt and the remaining 70% in equity as an asset class. "This rule of thumb helps investors keep in mind that their portfolios need to change as they age, becoming more focused on avoiding risk in their investing than on higher growth," says John C. Bogle, Founder, Vanguard Group. 

However, this just one way of doing it. Ideally, you should be allocating your money into equity, debt, gold, and real estate based on your risk profile—which again, is mainly determined taking cognisance of your financial health.

So, for example, if your personal income is good, live in a double-income family, do not have many liabilities to shoulder, you are young, have financial goals that are far away; you may partly skew your portfolio towards risky asset classes.

On the other hand, if you are a moderate risk taker, you can allocate 55% in equities, 35% in debt fund, and 10% in gold.

This chart is indicative and for illustrative purpose only.

How does asset allocation help?

1. Reduces Risk and Optimise Returns:

   The main purpose of asset allocation is to reduce the risk element to a minimum. Understand that each asset has its own risk trait and it is unlikely that all assets move in the same direction at the same time. If equities are in a bear market phase, it is improbable that other asset classes such as gold, debt instruments, will also be moving in that direction at the same time or vice-versa.

   Hence it is best to invest in more than one type of instrument to improve your chances of clocking optimal returns and achieving your long-term goals with minimal turbulence.

2. Helps in being attuned to your financial goals:

   Depending on your risk profile and the time horizon to achieve your financial goals, allocate your hard-earned money in different asset classes.

   For short-term goals you could invest in liquid funds, and/or other debt funds holding shorter-maturity paper, and for long-term goals into equity-oriented mutual funds.

   As a simple rule, remember, that the longer time horizon you have for your financial goal, the more you can allocate in equity to clock decent inflation-adjusted returns in the long-run. Equity can prove very risky for during the short-term.

3. Reduces tax burden:

   If you are in a 30% tax bracket and investing all your money in fixed deposits, it could prove tax-inefficient. You are making a big mistake.

   On the contrary, you should be allocating a dominant portion in equities even from a tax planning standpoint. Even after the new tax rule of 10% Long-Term Capital Gain Tax (LTCG) on gains over Rs 1 lakh, equity can prove rewarding if you select your investment avenues carefully.

   [Read: How LTCG Tax On Equity Investments Can Derail Your Financial Plan]  

   Plus, certain tax-saving avenues such as Equity Linked Saving Schemes (ELSS) can entitle you to tax benefit, a deduction up to Rs 1.5 lakh p.a. under Section 80C of the Income Tax Act, 1961.

   Tax implications differ for every individual and for every situation; so, you should always consider that as well while allocating your investible surplus amongst equity, debt, gold, and real estate to clock optimal post-tax returns, rather than pre-tax returns.

   Proper asset allocation will not only help you to determine the right asset class, but also the right investment product which will help you to reduce taxes.

4. Address Liquidity needs:

   Liquidity is also one of the vital factors while making an investment decision as some investments have a lock-in period and can’t be redeemed within that period.

   Suppose if you need money within a year, but if you have invested in instruments that have a lock-in period like ELSS, or PPF account, you wouldn’t be able to redeem or withdraw money.

   It would not be the correct investment avenue for you. Optimal asset allocation ensures that you can meet your liquidity needs as and when required.

Do note that investing and charting out asset allocation are highly personalised activities. So, please do not mirror your friends and relative’s asset allocation. One man’s meat has proven to be another’s man’s poison.  

[Read: Why You Should Not Ignore Personalized Asset Allocation While Investing]

To Conclude:

Eliminate all symptoms of bad financial health and inculcate good habits like saving and investing. By making prudent investment decisions coupled with optimum asset allocation will prove beneficial for your overall financial wellbeing.

PersonalFN can guide you with Personalized Asset Allocation, if you don’t have one, and help you select the best mutual funds for your portfolio.

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Happy Investing!

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