Asset Location is as important as Asset Allocation

asset location

This article was originally written by me for Money control. Published on 16 Feb’2015

For a perfect investment portfolio, proper asset allocation is very important. Asset allocation distributes your money into different asset classes as per your risk profile to manage the inherent volatility of different asset classes and brings optimum returns in your investment portfolio.

Asset allocation represents the broad distribution of your investment, but within that allocation, your asset location is also very important for the achievement of goals. Asset location signifies the product where investment is made to gain exposure to a particular asset class.

(Also Read: How to determine ideal asset allocation mix?)

There are four main asset classes available in India for investments – equity, debt, gold, and real estate. Within asset classes, there are multiple products available that can be selected based on near, medium, and long term requirements or goals.

The main considerations while selecting a suitable product are- risk, taxation, and liquidity. Most of the risk portion gets managed at the asset allocation level; rest can be taken care of at the product level. Liquidity concerns clearly depend on the goal targeted and how the other aspects of financial planning like emergency funding, insurances, etc. are being taken care of. Farther the goal, more of the investments can be locked in or invested in long term products. Let’s see the options available and how to select a particular product.

(Also Read: Importance of Risk Profiling in financial planning)


You can have exposure in equity through three instruments – direct share purchase through stock market, equity mutual funds, and Unit Linked Insurance Plans (ULIPs). While selecting the instrument you need to understand the expertise required to manage the exposure, especially if you are going with direct option. Liquidity and taxation wise direct equity and equity mutual funds are the same. The difference lies in the professional management and diversification feature that mutual fund offers, of course with some costs attached.

(Also Read: What is Equity, it’s more than stock market investment)

ULIPs also have professional management and diversification advantages, but being an Insurance product it has few other charges like mortality, allocation, administration, etc. attached to it along with fund management Charges. Also, the liquidity of the product is restricted, which may impact the rebalancing of asset allocation going forward.

(Also Read: ULIP or Mutual Funds, what to choose?)

So in all sense, equity exposure through mutual funds definitely has an advantage over others.

(Also Read: 5 ways to compare and select mutual funds)


There are multiple products available to get you the necessary exposure to this asset class. But here along with the basic parameters of liquidity and taxation, one should also watch the interest rate scenario in the economy. In falling interest rates scenario, the products with tradeable securities give much better returns than the fixed ones. (Read: How to select debt funds in a volatile interest rate scenario?)

All bank products (saving, fixed deposit) and post office products (Public Provident Fund, National Savings Certificate, Senior Citizen Saving Scheme, etc.) come under the debt category of investments. Endowment insurance plans also come under the debt category. Even mutual funds offer debt exposure through the diversified short, medium, and long term bonds. Corporate fixed deposits, non-convertible debentures, tax-free bonds all are debt products. 

(Also Read: How to manage debt investment risk?)

Taxation wise most of the debt products generate taxable returns except PPF, endowment insurance plans (If satisfies few conditions), and tax-free bonds. Mutual funds fall under capital gain taxation which allows indexation of returns after three years. Indexation considerably reduces the amount of tax outgo. (All you wanted to know about mutual fund taxation)

Post-tax and inflation, returns of debt products are not very attractive. But still, debt exposure is required in a portfolio to provide the necessary stability. It’s always better to invest in non-taxable or low tax instruments, with a mix of fixed and tradeable products to bring necessary push into debt instrument returns. Also, look at the cost structure of the product. (Also Read: Why Debt Investments should be a part of your long-term portfolio)

A mix of PPF and debt mutual funds works quite well. It is advisable to avoid endowment insurance plans as they have very opaque cost structures and low returns. (Read: All about PPF 2019)


Indians don’t require any asset allocation advice to buy gold. We are accustomed to buying gold on various occasions including marriages. This automatically gives us exposure to gold as an asset class. (Also Read: How good is Gold as an investment?)

It is an important asset class that should be a part of every investment portfolio, but not more than 5%-10%. A few years back when the world economy was passing through a slowdown we have seen exponential returns in gold. But the long term returns of gold is not more than 8%. Hence, it is not a suitable asset class for wealth generation. (Also Read: All About Sovereign Gold Bonds)

Gold can be bought in electronic form too. As an investment asset-buying, gold ETF is cost-effective. But if it is bought for personal then don’t increase exposure through ETFs. (Read: How Should you buy gold, physical or via ETF)

Real estate:

Real estate is the most popular asset class. Indians find safety in real estate. It seems so attractive that at times due to the quantum of the investment the whole asset allocation becomes tilted in favour of this asset class.

But you have to understand that this is the most illiquid asset class. You can’t sell it with a click of a mouse. There’s no ready market to sell this investment whenever required. One should be very careful while gaining exposure in real estate.

At present, buying a property is the only way to invest in this asset class, but very soon you will be able to invest in it through Real Estate Investment Trusts (REITs). You should be very clear about the purpose of investment. Though having one’s own house is fine it is not treated as an investment as it is for personal use. Another property should be bought with a clear goal in mind. This will help you decide on buying of residential or commercial property.

Buying real estate most of the time involves a loan and thus impacts your cash flow too. So it’s always advisable to achieve your goals through liquid investments and get into real estate only when the cash flow permits. (Also Read: 10 reasons why Real estate is riskier than equity?)

Proper asset allocation with good fit products will give you a healthy portfolio and a real chance at achieving your goals. (Also Read: Perfect Investment Portfolio, what it should look like?)

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He’s MBA ( Finance) gold medalist, a CERTIFIED FINANCIAL PLANNER, Chartered Trust and Estate Planner and SEBI Registered Investment adviser. He has authored a Book in collaboration with CNBC TV 18 Network 18 bestesellers , tiltled "The Art of Being Good with Money". An ex banker , having a 17+ years of long experience in financial services industry he manages clients across the globe. He is a regular contributor to various leading Media and publication houses. He has written for Moneycontrol, Dainik bhaskar, Business standard, Live mint, Indian Express, The Tribune etc. He has also appeared in TV shows by Zee Business, ET Money, National Door darshan, Jagran Online. He also delivers training on Various personal finance topics to various corporate houses. You may get in touch with him at [email protected]


  1. Nice article. I liked the point regarding gold investment. We Indians don’t need any advice about gold investment as everyone is preparing for their girl child’s marriage by buying physical gold. But I think we should start investing in gold via ETF also.

    • Thanks Santanu. We don’t buy gold only for girl’s marriage but also boy’s side accumulate gold for that occasion. However i think we don’t need any occasion to buy gold, we have so many festivals like diwali, dhanteeras, akshay tritya etc. which let us accumulate gold with no reason.
      See, its all about asset allocation. Gold allocation is necessary but not in excess. If you have decent physical gold holdings and you keep on buying physical gold now and then , then there’s no point having exposure through ETFs. It doesn’t matter how cost effective they are. It might lead your portfolio to be skewed.

  2. Nice Article…Investing in Gold ETF is far better than buying physical gold. Reits are still little far from becoming the reality on the ground.


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