Asset allocation: how the mix shapes the ride
On this page
What asset allocation means
Two people can own exactly the same shares and still have very different experiences, because one holds them as 90% of their savings and the other as 30%. In a year when shares fall by a third, the first person's savings drop about 30% and the second's about 10%, before counting what the rest did.
What each part does
| Asset | What it is | How it tends to behave | Main risk |
|---|---|---|---|
| Shares | Part-ownership of companies, directly or via funds | Largest swings; long periods of gains and falls | Deep falls that can take years to recover |
| Debt | Lending: FDs, bonds, debt funds, PPF, EPF | Smaller, steadier changes | Inflation eating the return; the borrower failing to pay; bond prices falling when rates rise |
| Gold | Physical gold, gold ETFs, gold funds | Often moves differently from shares | Long flat or falling periods; no income |
| Cash | Savings account, liquid funds | Barely moves | Loses value to inflation over time |
The useful property is that the parts do not all fall together every time. In calendar 2008, for example, the Nifty 50 fell by about half, while high-quality bonds and gold did not fall with it. That is not a rule: in some years everything falls together, and in others everything rises.
The same year, different mixes
Move the sliders to set a mix, and edit the made-up yearly changes for each part. The bars compare the mix with holding only shares.
Rebalancing
| Part | Start | After the year | Share after |
|---|---|---|---|
| Shares | ₹6,00,000 | ₹3,90,000 | 47% |
| Debt | ₹3,00,000 | ₹3,21,000 | 39% |
| Gold | ₹1,00,000 | ₹1,15,000 | 14% |
| Total | ₹10,00,000 | ₹8,26,000 |
Shares have drifted from 60% to 47% without anything being bought or sold. Getting back to 60% means moving about ₹1,05,600 from debt and gold into shares. After a strong year for shares, the move goes the other way.
Rebalancing is a rule for keeping risk where it was set, not a method for timing the market. It has costs: brokerage, exit loads and tax on any gains realised when selling. Many people rebalance on a fixed date once a year, or only when a part drifts more than a set amount, or by directing new money to whichever part is below its target.
Rules of thumb, and what they leave out
| Rule people quote | What it says | What it leaves out |
|---|---|---|
| 100 (or 110, 120) minus age | Age 30: 70% shares; age 60: 40% | Income stability, other assets, goals, how much a fall would hurt |
| 60/40 | 60% shares, 40% debt, for everyone | Age, timing of needs, existing EPF/PPF |
| Bucket approach | Near-term spending in cash and debt, long-term money in shares | How big each bucket is, and when to refill it |
The same mix can suit two people very differently. A government employee with a pension and a self-employed person with irregular income face different consequences from the same fall.
When the money is needed
The Nifty 50 has had falls that took several years to recover in price terms. Money needed for a fee or a house down payment in two years faces a different risk from money not needed for twenty. Many people therefore think of allocation goal by goal rather than as one number. See why the order of returns matters once withdrawals begin.
What to check next
- What is your mix when EPF, PPF, FDs, gold and property are counted?
- What would the total do in a year like the bad year in the calculator?
- When will each part of the money be needed?
- How much has the mix drifted since it was set?
- What would rebalancing cost in charges and tax? See what investing costs.
No mix is right for everyone, and this page does not suggest one. For a plan, consult a SEBI-registered investment adviser.
Educational explanations only, not investment advice, research or a recommendation to buy, sell or hold any security. Past performance does not indicate future results. Every example uses made-up round numbers. Read the Disclaimer before relying on any figure.