12.6What is asset allocation?
1What is it?
Asset allocation is dividing your money between asset classes: equity, debt (FDs, bonds, debt funds), gold and cash.
2Why does it exist?
It is the biggest driver of your portfolio’s risk. Different assets do well at different times.
3Diagram
| Profile (illustrative) | Equity | Debt | Gold | Cash |
|---|---|---|---|---|
| Conservative | 30% | 55% | 10% | 5% |
| Balanced | 60% | 30% | 7% | 3% |
| Aggressive (long horizon) | 80% | 12% | 5% | 3% |
4Practical use
Rebalance once a year: if equity grows from 60% to 70%, move some back to debt. This forces you to sell high and buy low.
5Quick revision
- Split across equity, debt, gold, cash.
- Matches risk to goals.
- Rebalance yearly.
6Knowledge check
Q1. Name four asset classes.Show answer
Equity, debt, gold, cash.
Q2. What is rebalancing?Show answer
Restoring your target mix by selling what grew and buying what fell.
Q3. Which matters more for risk: stock choice or asset allocation?Show answer
Asset allocation, usually.