Division of an investment Portfolio among different categories such as equity, fixed income, liquid, gold funds, etc. It depends on age and ability to tolerate risk.

Asset Allocation refers to the process through which an investor decides how to apportion the total investable amount in different asset categories according to his risk profile. Investors can choose from a wide range of categories such as equity mutual funds, debt based mutual funds, gold, real estate, cash etc. Factors such as age, lifestyle, financial goals and risk appetite of the investor play an important role in asset allocation. A well-designed asset allocation plan helps to minimize the risk of the overall portfolio.

For example, a moderate investor in early 30s might have 30% equity, 40% debt and 30% in real estate and gold as his asset allocation requirements. He would then have to balance his portfolio according to his asset allocation so that it is as close to his desired Asset Allocation as possible.