Asset allocation helps investors reduce risk through diversification. Historically, the returns of stocks, bonds, and cash haven't moved in unison. Market conditions that lead to one asset class outperforming during a given timeframe might cause another to underperform.There are some importance of the asset allocation given below:

1.Optimal Return:

In the absence of proper asset allocation many individuals invest in an ad-hoc manner. This in turn makes it difficult for them to determine whether the return on investments is sufficient enough to achieve their short and long term financial goals. Some investors are either too aggressive or conservative and invest accordingly, so they are unable to earn adequate returns on their investments.

2.Risk Minimization:

Based on your past investment experience or your willingness to take risk you will make your future investments decision. If you have earned good amount of returns in the past, you might become too aggressive and invest only into equities. While if you have already burnt your fingers in the past by investing into equities you may become too conservative and invest only in fixed income instruments such as Fixed Deposits, Recurring Deposits etc.

3.Help investments align as per Time Horizon:

Along with the risk profile, your time horizon is also a key factor to decide the asset allocation. Equities are considered very risky in the short term while less risky in the long term, as they will have more time to recoup from turbulent phase of the equity markets. While debt is considered less risky, the returns clocked by the asset class are usually insufficient to beat inflation, thus mainly for this reason it doesn’t help you to achieve your long term financial goals. Proper asset allocation will help you to determine the correct mix of equity, debt, gold, real estate and even cash based on your time horizon to achieve your financial goals.

4.Minimize Taxes:

Tax consequences are different for every individual and for every scenario so you should always view investment returns from the point of view of post-tax returns on investments rather than pre-tax returns as post-tax return is the return which you get in your hand. Proper asset allocation will not only help you to determine the right asset class, but also the right investment product which will help you to minimize taxes.

5.Adequate Liquidity:

Liquidity is also one of the vital factors while making investment decision as some investments have a lock in period and can’t be redeemed within that period.