How to Find Your Ideal Asset Allocation

How much should I invest in Equity?
How much should I be investing in Gold?
How much should be my debt allocation?
Should I buy house as investment?
All these questions are for understanding what should be asset allocation.

Everyone is talking about it right now. Especially with the financial crisis that we are going through currently due to Covid-19, it has become a discussion point with investors as well as financial planners.

People are now trying to find how could they avoid any drastic impact of stock market on their portfolio. In quest to just start SIPs without proper analysis, people have ignored one of the most important thing in managing investment. Their asset allocation.

Many people even don’t know their asset allocation. Crisis has made people realize that we can not just be investing in Equity. For a smoother investment journey, we also need to consider other investment avenues.

So what is asset allocation?

Asset allocation in most simple term is diversifying your savings or investments across different assets. As there is old saying – Don’t put all the eggs in single basket. Similarly we should not keep all our investments in one particular thing or asset.

If you keep all your money in say fixed deposit, you will struggle to beat inflation and also have problems when interest rates go down.

If you put all the money in say a house or property then you will struggle if you need money quickly. Real estate is a very ill-liquid asset. It takes lot of time to sell it and get money in hand. Also you can’t sell a part of it.

If you put all the money in stock market, you may suffer huge losses in particular year when there is crisis in economy like current year.

So what asset allocation means is take a calculated decision to distribute your investments across different assets. Generally it is observed that all assets do not appreciate or depreciate at same time.

In a particular year, your stock market may give you excellent returns. When stocks are down, your gold asset may give you good returns. So and so forth.

By doing asset allocation, you save yourself from volatility in particular asset but also reduce your risks related to particular assets.

What are different Asset classes

On Broad level, there are four main asset classes that are available for retail investors in India. These are as under

  • Real Estate – This needs no introduction to any Indian investor. Any investment in house, commercial property or plot falls under this asset
  • Gold – Another asset class that we Indians are obsessed with. We can buy jewellery , gold coins or gold fund, sovereign bonds to invest in gold. ( Even Silver can be considered as another commodity to invest in but for this article, I will stick to Gold)
  • Equity – Stock market investments like Shares, Equity Mutual funds, private equity comes in this asset class
  • Debt – You can consider most of fix rate instruments like FD, Recurring Deposits, EPF, PPF, NSC, NCDs, Post office Schemes, debt mutual funds etc to invest in debt.

Why asset allocation is important

Have a look at returns of three main assets in last four decades.

I have not taken into consideration real estate here. That is because it is difficult to get real numbers for Real estate returns. It really depends on locality, condition of house, buyer / seller needs to decide valuation. Real estate is equally important asset class and people with large investment amount should consider it as a part in their asset allocation.

In absence authentic data, I am focusing on Equity, Debt and Gold assets for now to explain the point. Do not focus too much on if numbers are exact or so. Let us use it to understand the concept of asset allocation.

Returns of different assets in last few years

For Equity, I have consider Sensex returns. For Debt, I have considered average interest rate of PPF, EPF, FD, Debt funds.

Bottom three rows in image show Average, Minimum and Maximum returns in a year in that asset. At high level, you can see Equity class has beaten other two classes very comfortably over long period. It has simple average return that is almost double of other two asset classes.

Why not invest in asset where returns are maximum?

Answer lies in managing emotions in investment, especially fear.

We are humans and not robots. A machine will think just logically or mathematically based on past data. It will keep investing in Stock year after year without looking at returns.

But whether we like or not, fear do play large role in our investment decisions.

Equity has very high level of volatility compared to all other asset classes. You can see a negative of almost 47% in a particular year in equity. That means you need to have strong guts to let your portfolio wiped out by half if you have only equity in your portfolio.

Let us understand with an example

To put it in perspective, imagine you were investing for your retirement and you are on threshold of retirement age.

You have accumulated around 3 Crore all of which is in equity. You think it is sufficient for your remaining life (You can refer article how long my money will last). Suddenly market goes down by 47% in that year and 3 Crore becomes say 1.6 Crore.

Will you be able to keep calm and have faith that it would bounce back in few years? I doubt. Most of people would panic even when it goes down to say 2.5 Crore and try to take some decisions in panic.

So complete equity allocation is not right strategy for most of common investors even if returns are high over long period. Risk of investing in single asset is too high. Unless you have really strong conviction like Warren Buffet.

If you are on other side of spectrum and if you have zero equity allocation, your investment growth might remain steady but it will be extremely difficult to build a good corpus. due to low returns

This is main reason, we need to take some middle path. We may not get very high returns but we don’t want to take very high risk as well.

Good investment planning is not about returns but it is about risk adjusted returns. We should distribute our investment among different assets – debt, gold, real estate and equity as per our risk profile.

So even if one asset goes down, other would help us sail through the period. You can read my article here to understand human behavior in crisis to understand why knowing risk profile is important.

Other reasons are changes in government laws, new innovations, changes in lifestyle or preference of people may impact particular asset negatively. And if you have most of money invested in single asset, losses could be huge.

How to do asset allocation?

Now that we know why it is important, let us look at how part. Well answer is surprisingly simple but not easy. Based on your risk profile, distribute your investment in different classes in some percentage.

As you contribute to your provident fund, start contributing to other assets as well. You can start with SIP in say Gold Fund and some Index fund to start with. This will hep you get exposure to Gold and Equity.

You will need to take a call on how much allocation you would like to have in these asset classes. We will see few examples below.

Real estate is really a big ticket investment. So I am keeping it out of discussion for now.

Higher the proportion of Equity class, better will be overall returns in long run (based on historic data). But from market volatility and risk perspective, we need to invest in other two assets as well.

So don’t just decide asset allocation based on what returns you want. Instead look at how much risk you are capable of managing. As you start reducing equity percentage from 100 % to lesser and lesser, returns would also start reducing.

But this will make sure your portfolio less volatile and easy to manage over long period.

So what is the formula for asset allocation?

Key is coming up with formula of allocation in different assets. How to decide how much percentage in equity and gold and debt.

Answer would be different for each investor. There is no scientific formula and you need to do it by trial and error. Try out different combinations and chose one that your risk profile allows you.

I have taken five different asset allocations. You can check each of them and see the returns as well as volatility. Look at bad periods especially. Check how much negative returns you could have handled without any stress.

That will give you some idea of which asset allocation suits you. Of course remember this is a historic data. We have seen a worse year with 47% negative returns. In future it could be less or more. Still this will give you some sense of what is comfort zone for you.

1. Very Aggressive Asset allocation

  • This allocation is for people with strong heart.
  • 70% in Equity asset (stocks or equity mutual funds),
  • 15 % in Gold and
  • 15 % in debt.
Very Aggressive Asset Allocation
  • See Year wise returns of your portfolio in last column
  • Compare last two columns when returns were negative (in red)
  • When Equity / Sensex crashed 47%, your portfolio got reduced by around 32 % as other assets helped a bit.
  • Returns are less than 100% equity allocation
  • Volatility is still high
  • You can see volatility is very high
  • Few instance of negative returns in this period
  • Maximum 32% drop in portfolio value in a bad year – ask yourself, can you handle it?

2. Aggressive Asset allocation

  • This allocation is also for people with strong heart.
  • 50% in Equity asset (stocks or equity mutual funds),
  • 25 % in Gold and
  • 25 %in debt.

  • See Year wise returns of your portfolio in last column
  • Compare last two columns when returns were negative (in red)
  • When Equity crashed by 47 %, your portfolio did crash but almost half (22 %)
  • Returns are less that first case but volatility is reduced as well
  • You can see volatility is still high but less than Sensex & first case
  • Few instance of negative returns in this period
  • Maximum 21.5% drop in portfolio value in a bad year – ask yourself, can you take it calmly?

3. Balanced Asset allocation

  • This allocation is for people with Neutral view of assets
  • Equal distribution in all three assets
  • 33.3% in Equity asset (stocks or equity mutual funds),
  • 33.3 % in Gold and
  • 33.3 % in debt.

  • See Year wise returns of your portfolio in last column
  • Compare last two columns when returns were negative (in red)
  • When Equity crashed, your portfolio still hold on well (just 13% down)
  • Returns are comparatively less but risk is significantly reduced
  • Volatility as getting very less
  • You can see volatility is almost half compared to full equity allocation
  • Negative returns count and impact is low
  • Maximum 13% drop in portfolio value in a bad year – Seems reasonable to handle

4. Conservative Asset allocation

  • This allocation is for Conservative people
  • 25 % in Equity asset (stocks or equity mutual funds),
  • 25 % in Gold and
  • 50 % debt.

  • See Year wise returns of your portfolio in last column
  • Compare last two columns when returns were negative (in red)
  • When Equity crashed, your portfolio did not had any significant impact
  • Returns are getting less but still much better than 100% debt portfolio which could have given single digit returns
  • You can see most of returns are positive
  • Even negative returns are single digit (worse case -7%)
  • Maximum 7% drop in portfolio value in a bad year – ask yourself, are you playing too safe?

5. Very Conservative Asset allocation

  • Typical India Investor Portfolio just started with SIPs
  • This allocation is for people with weak heart.
  • 20% in Equity asset (stocks or equity mutual funds),
  • 20 % in Gold and
  • 60 % in Debt.

  • See Year wise returns of your portfolio in last column
  • Compare last two columns when returns were negative (in red)
  • When Equity crashed, your portfolio had nearly no impact as hardly 20% in equity asset
  • Returns are very less but still managed to beat single digit returns thanks to Equity
  • You can see returns almost always positive
  • Least volatile returns of all the cases
  • Even worse case is -3 % in a year.
  • Returns are least as you are indeed playing just too safe
  • May be okay for conservative retired people


From the examples above you would have got some idea on expected returns from different asset allocations.

You would have got some idea on returns and risks.

Make sure there is appropriate allocation to different asset classes. Generally different assets prices do not move in one direction. If equity is down, may be gold or debt could rise.

You should try to find how much down slide you are comfortable with. Based on that consider equity , gold and debt allocation.

Returns may be less than 100% equity but investment journey would be much comfortable. I have not covered real estate as class as part of this article. But if you have a big portfolio, I think even real estate should have some part to it.

Comparison Table of different allocations

Above percentages and returns are just to illustrate the impact of asset distribution. Do not take it as recommendation.

Do your own research or consult financial planner before taking any financial decision. Idea is to give some sort of comparison so you could take appropriate decision.

Keep your Portfolio updated

Always have a portfolio with details of all your assets recorded at one place. You can use some online tool like Moneycontrol Portfolio or simple paper to list all the assets and their values.

This will help you see bigger picture. Many times we just monitor stocks and mutual funds. This creates more panic when there is any crash in stock markets.

I know a person who got panic when his 70 Lac equity portfolio became 50 Lac during crisis period in 2020. He felt he portfolio is down by 30%.

Later he realized that if we add all other investment assets like Gold, Sovereign Bonds (Gold asset), his second house value (real estate) and EPF, PPF, Debt funds, FDs (Debt asset), actual portfolio was around 2.5 Cr.

His other 1.8 Cr would at least give around 15 Lac return in that year. So portfolio may give net 5 Lac loss on a valuation of 2.5 Cr. That is just 2% negative return.

Taking such holistic view helps manage our emotions better. Else we tend to take some incorrect decisions due to panic.

When to revisit asset allocation

Once you decide on asset allocation, stick to same. Do not keep altering it as particular asset valuation moves up and down to get that extra return.

That will defeat asset allocation purpose. However one should review their asset allocation at least every three years.

Especially as you come close to your goal (say retirement), please check if you are still comfortable with same asset allocation.

General thumb rule is as you age, your equity allocation should get lesser and lesser. Asset allocation change should be based on change in risk appetite and not asset returns.

Don’t reduce Gold allocation just because it was not performing well for few years but rather change if you feel you are better equipped to take more risk in say Equity.

Do comment and let me know how you manage your asset allocation and what are your learning.

That’s all for today. Happy investing.

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