What is Portfolio Allocation? Meaning, Strategies, and Examples

The primary objective of investment portfolio asset allocation is not just to increase returns, but also to reduce risks. Every asset class behaves differently under different market situations. Thus, each of them carry a different level of risk and potential for returns.

With successful asset allocation, you can balance your risk and returns smoothly. You can do this by adjusting the portfolio exposure to different asset classes. This adjustment can be done based on your risk tolerance, investment horizon, and financial goals.

When one asset class performs well, you can expect decent returns. On the contrary, if one of the asset classes doesn’t perform well, the returns naturally decline. Therefore, even when the market performance of an asset class is not great, you can expect good returns from another asset class. This way, there’s a balance between risks and returns.

Diversification of portfolio helps you create an optimum balance between risk and potential returns, irrespective of changes in market conditions. When equity markets are undergoing a correction, your debt allocation will help your portfolio manage the downward movement better.

Now, let’s consider that the market interest rates rise and bond prices drop. At this time, your equity allocation helps your portfolio provide returns though debt instruments might face a decline in returns.

Aggressive portfolio allocation mainly include equities. This is done so that their value can fluctuate widely on a daily basis. Having an aggressive allocation means aiming to achieve long-term capital growth. The strategy to build an aggressive portfolio is called capital growth strategy. For diversification, investors with aggressive portfolios usually add some fixed-income securities.

A conservative portfolio allocation generally allocates majority of the portfolio to lower-risk securities. These include fixed-income instruments and money market securities. A conservative portfolio aims to protect the principal value of your portfolio. Hence, these models are often known as capital preservation portfolios.

A balanced portfolio allocation includes a combination of stocks, bonds, and various asset classes to maintain a balance between risks and returns. It can be beneficial for you if you want to grow your wealth and manage risk simultaneously. A balanced portfolio aims at diversification through optimum asset allocation in different types of investment products. This helps in spreading out the financial risk.

- Equities: 60 to 65%

- Fixed Income Securities: 25 to 30%

- Cash and Equivalents- 5 to 10%

- Fixed Income Securities: 60 to 65%

- Equities: 25 to 30%

- Cash and Equivalents: 5% to 15%

- Fixed Income Securities: 30 to 35%

- Equities: 60 to 65%

- Cash and Equivalents: 10 to 15%


Note: The above portfolio allocation examples are based on standardised investor profiles. In real life scenarios, individuals will have different financial needs based on their age, risk appetite, financial goals, etc. Hence, the asset class allocation might differ on a case by case basis.

Let us assume that you’re planning for retirement at the age of 60 and currently, you’re 40 years old. Suppose in the coming years, the stock market drops by 30% and your portfolio drops by 20%. The fact that it outperformed the market by 10% is a relief.

An asset allocation for your retirement should be mainly focused on fixed income investments. This is because you might want to focus on capital protection rather than wealth generation.

However, if you want to save for your child’s higher education, the portfolio can include 50% equities and 50% fixed-income. This arrangement will help in both capital growth and protection. With the change in financial goals, the portfolio asset allocation might change accordingly.

You should be aware of your risk appetite before you choose the allocation percentage of different asset classes. Equities are often considered as a higher risk asset class compared to debt, real estate or gold.

If you are a risk tolerant investor, you can allocate approximately 65 to 70% of your funds to equities. If you’re a risk averse investor, you can opt for a low-risk portfolio that contains approximately 15 to 40% of equities.

For an ideal portfolio allocation by age, you should understand your financial situation, risk appetite, and financial goal. These factors evolve with the passing years. Let’s uncover the investment strategies based on different age groups below:

i. Investment Portfolio Allocation in Your 20s and 30s

Your 20s are the time when you start earning. At this time, you can focus on wealth creation as you have fewer responsibilities and your retirement is far away. So, you’ll have sufficient time to overcome the market fluctuations. Thus, it’s recommended to allocate at least 75 to 80% of your funds to equities. You can allocate the remaining percentage to bonds.

As you approach your 30s, you might have a more stable career and a family to look after. At this time, you can consider replacing your investments in bonds with an emergency fund to fulfill your responsibilities.

ii. Investment Portfolio Allocation in Your 40s and 50s

While you’re in your 40s, you should focus on both wealth creation and stability. You can do this by allocating 75 to 80% of your funds to equities and the remainder in debt instruments. This will help you make a smooth retirement plan.

In your 50s, you should concentrate on preserving capital. You can do this by moving toward more stable investments like fixed return instruments like FDs and gold. It helps you reduce volatility. You can also invest around 60%-70% in equities on the basis of your risk appetite.

iii. Investment Portfolio Allocation in Your 60s and 70s

Most probably, you’ll be retired by this time. As there’s no regular income source,you should focus on accumulating wealth and generating income. It can be a great idea to shift your portfolio towards income-generating investments. Some of these include annuity plans, MIP, POMIS, FD with regular payouts,etc

iv. Investment Portfolio Allocation Above 70 Years of Age

Asset allocation in your 70s would typically be conservative, and income-focused. You might want to focus on capital preservation during this stage of your life. Thus, you can consider investing in fixed return investments like FDs and PPF. You can also expect to receive payment from the different types of pension plans that you might have bought earlier..

To answer the question, “What is the best portfolio allocation?” you should first choose the right asset classes. Some popular asset classes include equities, bonds, commodities, etc. You can have a discussion with a financial advisor to decide which asset classes suit your needs.

It’s never a wise decision to allocate all your funds to a single asset class. Diversifying your portfolio helps you maintain a balance between risks and returns. You can do it by choosing different asset classes for different purposes.

For example, you can choose to invest approximately 60 to 65% of your funds in equities to grow your wealth. The remaining can be invested in various debt instruments for capital protection.

Portfolio rebalancing is the process of reallocating your assets to meet your predefined risk and reward profile. It’s recommended to review and rebalance your portfolio so that it remains aligned with your investment objectives. Further, it can also reduce the exposure to unintended risks.

If you lack an investment plan, you may have to incur losses in the long term. For example, it might not be safe to invest in fixed deposits when the inflation rate is expected to rise. It’s because the FDs have fixed interest rates which might not be able to cope with the increasing inflation rate.

Make sure to define your financial goals, study the economic conditions, and assess your risk appetite. This will give you a clear investment roadmap.

If your investment is concentrated in a few asset classes, or sectors, there might be the risk of wealth erosion. Hence, you should take care that your portfolio has a variety of asset classes. These can be equities, debt instruments, fixed return instruments, FD, RD, PPF , real estate etc. Besides, all your equity instruments should be spread across different sectors like energy, health care, information technology, etc.

If your investments are spread across multiple asset classes, it can be difficult for you to track them. To prevent over diversification, you can pick a manageable number of investments. This will help you stay aligned with your investment strategy.

All your market predictions might not be correct. Even experienced investors are not always successful in predicting market conditions. Hence, it’s better to adopt a long-term investment strategy. This helps you focus on your financial goals rather than short-term market fluctuations.

Revenge trading is a psychological trap in which traders attempt to recover their losses quickly. It often leads to irrational trading decisions, driven by emotions. This approach can lead to further loss because such hasty trades are not supported by research or market analysis.

If you want to avoid such losses in the future, you should analyse why you faced the loss. That would be a smarter approach than trying to cover it immediately.

It’s not enough to just keep investing. You should also monitor the performance of your investments. Investments need to be reviewed periodically. This ensures that they are aligned with your financial goals and changing market conditions. If you don’t monitor your portfolio, you might miss out on signs that indicate rebalancing it.

You should also stay updated with the latest news. This will help you learn about market fluctuations and the well-performing asset classes.