Asset allocation is a diversification strategy. Proper asset allocation helps balance risk and reward by dividing money between different asset classes - cash (liquid fund), debt and equities.
Depending on an investor’s time horizon and risk tolerance, Wealthy suggests the right mix between liquid, debt and equity funds. For instance, if an investor is looking at a very short-term horizon with very little tolerance for risk then money is invested in a portfolio which is 100% liquid funds. Similarly if someone is investing for long-term with an aggressive outlook then the money is invested in a 100% equity portfolio.
Further, in all such portfolios money is further allocated to different asset classes. For instance, 100% equity portfolio is allocated in certain ratio between small cap, mid cap and large cap equities. Such allocation helps you earn optimal returns while also maintaining the level of risk you are comfortable with.
Each Wealthy portfolio has been simulated using historical data of last 15 years to create the most optimal allocation model.
Typically, to take advantage of asset allocation, users create multiple portfolios to meet their various needs. For instance for long-term wealth creation, most popular portfolio is Long Term Aggressive (100% equity) portfolio. People who have near term goals such as buying a car or saving money for marriage or vacation typically invest in Medium Term Balanced (60% equity, 40% debt) portfolio.