There are many questions in the mind of investors during the current crisis, such as- Should I continue my SIP in equity funds? Should I invest in debt funds instead of bank FDs? Can gold save me from the current crisis? Are Hybrid Funds Good for Long-Term Investment?
What really determines the 'well-being' of your portfolio is your ability to take risks, the desire for risk. In times of economic uncertainty, it is important to remodel your investment portfolio because almost everything around us has changed. It would be perfectly reasonable to reevaluate your risk appetite. This is necessary not only to protect your investment portfolio from further losses but also to make the most of the hidden opportunities amidst the turmoil.
According to a quantum mutual fund company, each asset class has a risk-return characteristic that is appropriate to the individual's risk appetite, investment objectives, financial goals, and the time is taken to achieve them. Let us look at the nine factors that determine asset allocation by risk profile -
Have you heard of the 100 Rule? This is the easiest and most interesting way to determine risk according to your age. It simply states that you should take 100 numbers and reduce your age from it. The result should be the percentage of your portfolio that you dedicate to equity mutual funds. If you are 25 years old, then according to this rule you should invest 75% of your money in mutual funds. And if you are 75 years old, then you should invest 25% in equity mutual funds. In other words, the fundamental principle behind age-based asset allocation is that portfolio risk requires your risk to decrease with age.
Your annual income
Looking at expenses, the higher the income, the more you may want to take the risk. Of course, things have changed a bit now, that's why, dear investors, revaluation of risk becomes more important.
Your current asset
Are you a young investor and starting your wealth creation journey? Or are you a diversified veteran investor with high-value assets? This will determine a lot on your risk appetite.
Current financial liabilities
As stated above, let's say you are an experienced investor or high-income person. If your current liabilities are high, your risk appetite may be reduced. Also if you have a low income but no current liabilities, you are free to take more risks.
Your knowledge about financial markets
This can be your metamorphosis. If you are well aware of financial markets, you can aim for prudent asset allocation. For example, equity is very risky if you are investing for a short period, but similar equities can give a very attractive risk-adjusted return when you are holding for a long period. Thus increasing the chance of getting the most out of your portfolio and ultimately earning higher risk-adjusted returns.