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Picture this. You get a Rs 5 lakh windfall and are in a tearing hurry to put the money to work. Not one to put all your eggs in one basket, your friend suggests a mutual fund scheme that promises to take care of your asset allocation needs, diversifying across equity, debt and gold. You jump at the suggestion. But should you invest the entire sum in it?
“Asset allocation funds can instill discipline to your portfolio,” said R Sivakumar, head – fixed income, Axis MF, which launched its asset allocation fund in 2010. “Although investors talk about asset allocation few manage to get their asset mix right. Most are swayed by the flavour of the season or the momentum in a particular asset class and skew their portfolio in that direction.” That's not all; these funds also do away with the need to actively rebalance one's portfolio.
Financial planners, though, feel the funds may not help investors achieve the right asset mix. “These funds do not offer a customisable plan and are a lazy way of doing asset allocation,” said Kartik Jhaveri, director at Transcend Consulting (India).
Typically, an asset allocation strategy needs to take into account the individual's age, financial goals, risk profile as well as net worth along with the prevailing market environment. “The asset allocation funds in the market today mostly look at the market environment but leave out the other aspects. An ideal asset mix can only be chalked out after assessing all these aspects,” said Manoj Nagpal, CEO, Outlook Asia Capital, a Mumbai-based wealth management firm that tracks MFs. He recommends investors approach a financial planner rather than depend on asset allocation funds for their needs.
Asset allocation funds in India follow either a fixed asset allocation or tactical asset allocation strategy. Nagpal feels that a fixed asset allocation approach may not work as an investor's needs are dynamic: “What is right for him today might not be right after three years. An investor's goals, lifestyle, net worth and even his risk-taking ability might change. An asset allocation fund does not take into account these changes.”
Tactical asset allocation funds in India typically use a quantitative model wherein money is assigned to different asset classes based on a mathematical formula. According to experts, quant models do not work in all market conditions and may underperform in a bull market. For instance, DSP BlackRock Dynamic Asset Allocation Fund, a fund that employs a quant model to work out its asset allocation strategy, has invested about 10% in equities since the time of its launch in February, thus missing out on the market upmove during the period. The fund currently has 12.6% invested in equities, according to Value Research.
Axis MF's Sivakumar admits that it's not possible for fund houses to create tailor-made products for different individuals but says these funds could be used as a starting point: “These funds should be used as a base to achieve your asset allocation needs. They are especially useful for those who are unsure about the right time to invest.”
Investors also need to be mindful that most of these funds are fund of funds, taxed as debt funds. Debt-unit holders selling their units before three years will be taxed in line with slab rates, while gains for others will be taxed at 20% with indexation.
Some of the asset allocation funds in the market include Axis Triple Advantage Fund, Franklin Templeton India’s Multi-Asset Solution Fund, Birla Sun Life Financial Planning and DSP BlackRock Dynamic Asset Allocation Fund.
