Asset allocation or active asset allocation is of interest to all investors. But, what does it mean? To make matters easy for ourselves, asset allocation is exactly what it states 'asset allocation'.
Let's say, our total savings and reserves are INR 1,00,000.00. This amount is an asset to start with, or what we can call our asset base. From this asset base we would be employing funds for investment in various financial instruments and securities.
Before we deploy or employ our funds or asset base into financial instruments, we as investors would have to plan on what percentage of our total asset base we would invest in 'equity, debt and cash' or in other words 'stocks, bonds and cash' or 'growth, income and cash'. Notice here that different words carry the same meaning.
'Equity = Stock = Growth'. 'Debt = Bond = Income'. And 'Cash = Cash = Cash'.
Asset allocation is the process of evaluation and planning what proportion of our asset base would be invested in equity, debt and cash (i.e. various financial instruments and securities) to fulfill the needs of our investment plan. And when done actively is called active asset allocation. Here there would be a trade-off between our 'aversion to risk' and the 'need for performance'.
So, a portfolio would basically be an asset mix comprising of equity, debt and cash that best meets the requirements of the investment plan of an investor.