Are asset allocation funds right for you?

While these funds help diversify one's portfolio, they are not tailor-made to suit individual needs

In the past year, equities have risen by 35 per cent, gold is down almost 10 per cent and the fate of debt instruments hinges on future interest rate cut/s. Investors with a sizable corpus to invest might understandably be a bit nervous now and might not want to bet on any one asset class.

That’s where asset allocation funds come in. They typically invest in a mix of equity, debt and gold, and do away with the need of timing one’s entry or actively rebalancing the portfolio.

“Asset allocation funds can instil discipline to your portfolio,” says R Sivakumar, head – fixed income, Axis MF. “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.”

 

But it would be a mistake to rely on them completely. For one thing, these funds work for a pool of investors and do not offer a customisable plan suited to an individual's needs. They might not take into account the individual’s age, financial goals, risk profile and net worth, for instance. “The asset allocation funds in the market today mostly look at the market environment but leave out the other aspects,” said Manoj Nagpal, CEO, Outlook Asia Capital, a Mumbai-based wealth management firm that tracks MFs.


Portfolio construction is not a one-time job but a work in progress. So, investors would be better off approaching a financial planner or a wealth manager to get their asset mix right. This gives them the leeway to periodically alter their asset allocation plan in consultation with their planner, in line with changing goals and risk-taking abilities. Fixed asset allocation funds will not do this for you. Even tactical asset allocation funds that dynamically alter portfolios have limitations, as their changes are mostly based on current market information.

Investors need to be mindful that most of the asset allocation funds are structured as fund of funds and invest in funds from the same fund house, limiting access to top funds in the mutual fund universe. Little wonder, then, that financial planners describe these funds as a “lazy man's way of doing asset allocation” and insist it is best to invest separately in equity, debt and gold funds.



Axis MF's Sivakumar admits that it's not possible for fund houses to create tailor-made products for different individuals. “These funds should be used as a starting point or a base to achieve your asset allocation needs,” he says.

Investors wanting to invest in such funds need to be aware of two more things. One, unlike equity funds, they might invest lumpsum and give SIPs a miss. A lumpsum investment will work as the standard deviation or volatility in these funds is much lower than diversified equity funds, said experts. Two, despite some equity investment, these funds are treated 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 per cent with indexation.