It has been a year of bull run for investors with the benchmark stock indices notching up an average 25 per cent gain year-on-year. Investors in equity and mutual funds have made the most out of this rally with well-informed individuals cherry-picking stocks in the mid-cap and small-cap segments. The less informed and a growing class of retail investors put their money in equity-linked mutual funds, managed by investment advisers.

Various factors have been at play that nudged investors to move their money from physical assets to financial assets. These include some passing disruption in the physical asset market, caused by the demonetisation and the goods and services tax.

But one thing that everybody accepts is the fact that investors now prefer to put their money in liquid financial assets rather than moving their cash to physical assets such as gold or real estate.

Hence, investors have broken away from their herd mentality and changed their investment theme to "easy to gain but hard to lose" paradigm. In short, they act more like weathervanes than mobs.

Making informed choices

Asset allocation and asset management are the two sides of the same coin. The nuances of the asset management industry are complex. All of them have their own evolutionary narratives written against the backdrop of fast-changing investor goals and regulatory ecosystems.

But the crux of asset allocation remains one and the same - preserving assets and keep it growing, however, little or big the sum involved.

Taking a single, small but wrong step may often end up in disaster. Therefore, it is always better to take advice from seasoned professionals before investing money.

Stick to the basics

You can ensure steady growth and returns by sticking to the basic rules of prudent asset allocation and managing it efficiently. Decisions on dividing the assets between liquid and fixed assets complete the story.

Central to asset allocation is the question of what percentage of assets should be kept in liquid form or how fast an asset can be turned into money when an emergency comes up and what part of the wealth should be parked in fixed assets.

Here, the primary options are fixed income assets such as bank fixed deposits (FDs), good quality debt papers, gold, equities and mutual funds. These asset classes come with their own strata or sub-classification for the sake of diversification.

However, the strategies of asset distribution often vary from person-to-person, depending on the age. The "one size fits all" approach seldom works in the case of asset allocation.

For instance, the asset allocation strategy of a retired person should be diametrically opposite to the approach of a young salaried individual.

For a retired person, it is important that his/her financial net worth is classified under different tenures. A superannuated person should divide his/her net worth into three categories - short, medium and long term. A higher sum should be with fixed income schemes, a safe option to meet short- and medium-term needs.

Long-term funds, commonly referred to as risk capital, can be invested in equity and diversified funds or stocks, according to the risk taking capacity of the investor. Around 5-15 per cent should be parked in gold, which can be liquidated easily at any point of time. This again depends on the individual's asset allocation outlook.

However, when it comes to businessmen, the strategy should be totally different. They should take into account their risk appetite, keeping their age in mind. If they have a better risk appetite, higher allocation can be made in equity-oriented funds or they can invest directly in stocks.

Young salaried individuals, on the other hand, have higher risk taking ability. Since they are salaried, they should normally have a regular monthly surplus. In such a scenario, higher exposure to equities is advisable and they can invest through systematic investment plans.

The thumb rule

A few words of caution are in order here. The young and the salaried should not splurge their income by turning to purchases on credit. They should have pre-set priorities and goals. They can allocate their income in various investments before spending which should be in sync with their pre-set goal.

Asset allocation is critical to a wise and prudent wealth management strategy. Right from the beginning, it is good to do the financial planning, keeping the risk appetite and short-term commitments in mind to optimise asset allocation and strike a balance between the needs and returns. That way, the investing experience in the long term will be satisfactory and give you a sense of achievement.

So, there are two broad things to keep in mind for asset allocation: how to take care of your money and how to make your money work for you.

The writer is associate director at Geojit Financial Services