Look for opportunities in rate-sensitive space

How much should one be exposed to equities and what proportion of one’s investments be put in fixed income is a question which plagues many a mind. In technical terms what your asset allocation should be—is as much a personal call as it is with regards the current economic environment. Factors like age, one’s risk-taking ability, current asset base, financial goals and the market outlook are the keys to determining how much should the allocation be in each asset class. While equities have the ability to generate higher returns, the associated risk with the asset class is also higher.

A broad thumb rule for allocation to equities is (100—age of individual). Thus if your age is 30, allocation to equities should be 70%. But as discussed earlier, one’s risk appetite also plays a crucial role for arriving at an asset allocation decision. For this, we identify investors into three categories of conservative, moderate and aggressive. A conservative investor who wishes to minimise his risks should allocate up to 20% of his capital in equities at the most. Similarly an investor with moderate risk appetite should keep his equity allocation between 20% to 40%. The aggressive investor may allocate between 40% to 70% of his capital in stocks.

Speaking of equities, buoyed by strong policy action by the government and central bank action globally in the US and Europe, Indian equity markets have done well in the calendar year 2012,

... contd.