When did you last review your portfolio? If the answer is I check it every day, you are missing the point. You cannot review something rationally if you see it too often or after too long. Periodic & systematic review can help you to judge performance of your portfolio based on your investment objective and suitable asset allocation strategy.

What is asset allocation?
To simply put, not to keep all your eggs in one basket! Conventional definition as per Wikipedia is ‘Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.’ This definition gives us the multiple object i.e. purpose of asset allocation:

  1. Strategy: Asset allocation is not just a blind game of putting things in different baskets. It is a process of scientifically or logically designing a strategy and implementing it.
  2. Balancing Risk & Reward: By applying this process, one decreases the chance of risk and simultaneously increases the chance of reward. At the time of uncertainties in the market one can keep the motivation intact to continue if the portfolio is relatively less volatile and performing better. Thus in the long run it increases the chance of reward.
  3. To Compensate Risk Appetite of Investor: Asset allocation is designed in a way which is suitable to the risk appetite i.e. risk tolerance of the investor. If investor is very sensitive about the market, he is advised to invest in a mutual fund scheme which contains more of fix income instruments.
  4. Goal of Investment: Goal is even more important than asset allocation i.e. asset allocation is designed based on one’s financial goal. If the goal is for an important need like child’s education, it has to be relatively less risky.
  5. Time Horizon: More you stay invested in the market, lesser are the chances of loss. Long time horizon help the fund to neutralize short term market uncertainty and portfolio can get a chance to deliver better returns due to power of compounding. While the fund manger certainly plays his/her role for generating alpha, any good strategy will take a reasonably long time to give superior returns.