The basic principle behind age-based asset allocation is that your exposure to portfolio risk needs to reduce with age.
As a person grows old he is willing to take the lesser risk. Hence a person approaching his retirement may wish to invest in Assets having lower risk and assets having higher liquidity (Asset Allocation). This way he may wish to invest very little into equities and large sum into debt or cash.
As against that, a young person who has ample time at his disposal can invest large sums in high risk and high return instruments like equity or equity mutual funds and a small amount in other asset classes like debt or cash.
Similarly a person in the middle of his age would prefer to have Equity, debt, and cash in the right quantity in his investment portfolio.
Also Read – Asset Classes! What are they and what role do they play in your investment