Define Asset Allocation
Asset allocation decision is about dividing the investments between asset classes such as equities, cash and money markets equivalents, bonds, insurance, real estate, derivatives. Commodities, antiques and art, international financial instruments. The three main categories are Equity, Debt and Cash and deciding how much goes where depends on your goals, time horizon and risk taking capability. For instance, for a goal like retirement that is say 20-25 years away and with a risk bearing capacity of moderate you could allocate 55%-60% in Equity (the riskier option which earns well over the long term) with the remaining in fixed return instruments.
