Last Updated on February 12, 2022 at 6:21 pm
For a given financial goal, how do I determine the asset allocation? That is, how do I decide the amount of equity exposure and therefore, fixed income or debt exposure? Let us try and discuss this and use a calculator to see how different asset allocations will affect the future corpus intended for a financial goal.
Step 1: Decide equity exposure
There is no formula to decide the right equity exposure. There is no right way or wrong way. We need simple personalized thumb rules. I would like to base my rules based on rolling returns of an index like Sensex or Nifty.
This is what I would do:
For goals less than 5 years away: no equity exposure.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Between 5-10 years: Not more than 40% for an important goal and about 60% for a less important goal.
Between 10-15 years: 40-60%
Above 15 years: 60%.
I like to stop at 60% because of this: Asset allocation for long-term goals
Step 2: Have a return expectation
For me, this is also based on analysis with past data. I have several posts on this. Here is just one:
What Return Can I Expect From Equity Over the Long term? Part 1
Above 15Y, I expect no more than 10-12% from equity. Anything above 14% is nuts.
Between 10-15Y, 10%
Below 10Y, 8%.
For debt, just the post-tax return from FD for the duration you have in mind: 6-7%.
Step 3: Calculating expected portfolio returns
Once you decide on the equity exposure, and the return expected, you can calculate the expected return from the portfolio.
Equity exposure: 60%. Return expected 12%
Debt exposure: 40%. Return expected 7%.
So the portfolio return = (60% x 12%) + (40% x 7%) = 10% (after tax).
Step 4: How much can I invest?
Now I need to know how much I can invest each month for this goal, and how much I can increase this amount each year.
Step 5: What is my target?
What is the present cost of the goal that I have in mind? What is the reasonable rate of inflation associated with this expense? What is the future cost of the goal for the time duration that I have in mind?
Step 6: Minor adjustments
All the above steps are independent and can be performed in any order. With the above inputs, the next step is to find out if the target corpus can be achieved.
Any current investments have to be taken into account. I have not included this in the current sheet as it might become too messy.
If yes, the next step is to start investing.
If not, minor adjustments could be to the investment amount, the rate at which it increases, equity exposure, return expectations to meet the target. Use our Robo advisory tool to automatically determine the correct asset allocation for your goals and how to vary it in future (risk-reduction strategy).
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)