The first step in the Financial Planning process is to decide your goals and review the resources available to achieve the goals. It is also essential to take into consideration the investor’s age, income and risk appetite. Also a realistic expectation must be set with regards to the returns that are expected from the Investments.
Once the above facts are finalized a risk profiling of the investor is done to gauge his attitude
towards risk in terms of ability and willingness to take risks. Based on these findings an asset allocation strategy is finalized. The asset allocation could include Equity based mutual funds, debt based mutual funds, commodities, real estate etc.
While choosing Equity based mutual funds an allocation must be decided for large cap, mid cap, small cap and sector and thematic funds. While choosing the funds, parameters such as Sharpe Ratio, Beta, Standard Deviation and category of the mutual fund must be considered. While choosing Debt based mutual funds the modified duration of the funds, average maturity, credit risk and portfolio concentration must be considered.
A combination of Equity and Debt based mutual funds must be selected based on your long-term asset allocation strategy. The portfolio of investments must be reviewed annually to monitor it’s performance. Portfolio Rebalancing must be done whenever the asset allocation deviates from what has been decided at the time of starting the Investments and to ensure that asset allocation is in sync with investor’s risk profile and needs.
Allocation of resources much be in line with the goals set up by the investor. It should allow for enough resources and time after taking into consideration the risk which the investor is willing to take to achieve the desired results.
Related reading: good mutual fund schemes to consider, and asset allocation strategy basics.
