Personal Investment: A Note on 12:20:80 Formula

For every investor, adopting the right asset allocation strategy takes care of downside risks while making the most of market movements. Generally, asset allocation relates to the amount of money an investor allocates or invests in different asset classes for diversification to protect the downside risks, which refers to the loss in value of the investment.

In this regard, the 12:20:80 asset allocation strategy can be adopted to reach financial goals in a better way. 

This strategy involves three simple steps of asset allocation, which can suitably help to address any of the concerns related to reaching the financial goals, whether short-term or long-term.

Step-1: 12 months: Maintain an emergency corpus
It is crucial to set aside 12 months of the expenses in the liquid fund to address financial emergencies. As a thumb rule, prior to kickstarting the investment journey, ensure that you have set aside at least 12 months of the monthly expenses as an emergency fund. This amount could be saved in bank accounts or a liquid fund, which prioritises safety and liquidity over returns.

Step-2: 20 per cent: Invest in gold

Gold has been regarded as a hedge to beat inflation and economic volatility. Therefore, aim to invest 20% of the investable surplus into gold which generally has an inverse correlation with equity. Being a highly liquid asset, it can be easily bought and sold in the market. Apart from purchasing physical gold, an investor has the option to invest in gold mutual funds and Exchange-Traded Funds (ETFs). 

Step-3: 80 per cent: Eye the equities

Allocate the balance 80% of the investable surplus in a diversified equity portfolio, which has the potential to help an investor reach their financial goals over the long term. Ideally, each equity investment within this portfolio should be such that it adds unique value. Also, ensure that the portfolio is not biased towards a particular style or sector.