Art of allocation

Asset allocation funds can churn the corpus across asset classes as per the changing economic conditions.

What goes up must come down is a cliche best explained by the gyrations of the stock market. To counter the market uncertainty and protect your investments, you need to hedge your bets. This can be done by allocating your assets to different categories like bonds, PPF, equity, gold, bank deposits and cash. Though diversification can't guarantee the safety of your investments in the future, it can help balance the risk.

Where you want to invest your money will depend on a number of variables such as your present and future income and liabilities return expectations, risk appetite and age. For instance, if equity constitutes 50% of your portfolio, you might want to bring it down to 20% as you grow older. Though this sounds easy in principle, few people know how to put it into practice. For such investors, it is advisable to put their money in asset allocation mutual funds.

Asset Allocation Funds
Scheme name Corpus (Rs Cr) NAV 6-mth return 1-yr return Fund manager
ING dynamic asset allocation fund 35.79 10.04 2.54 -3.99 Manish Bhandari
LICMF systematic asset
allocation fund
154.79 8.56 -13.47 -15.43 Ashish Kumar
Tata SIP fund-
scheme II
66.55 7.49 -20.66 -28.23 Venugopal M.
Tata SIP fund-
scheme I
223.64 7.15 -27.78 -34.38 Venugopal M.
investment scheme
16.97 11.46 -26.76 -37.02 Swati Kulkarni
Magnum NRI Investment
fund-flexi asset
7.45 16.10 -30.81 -43.24 Ritesh Sheth
Kotak dynamic
asset allocation
384.51 7.18 -40.57 -52.15 Ritesh Jain

Category avg of asset allocation funds

Category avg of equity diversified funds

18.99 -26.46  
-33.50 -48.49  

Unlike the traditional diversified equity funds, where the allocation of assets is fixed and defined in their offer documents, asset allocation funds can churn their corpus across asset classes as per the changing economic conditions. This allows the fund managers to shift the investing focus to equity, debt or cash, depending on the outlook of these markets. If you were to change your investment from debt to equity fund, or vice versa, you would have to pay the exit or entry loads and taxes, depending on the holding period of the fund. Asset allocation funds are not subject to these charges despite there being a change in the asset mix.

There are two types of asset allocation funds: tactical funds and life stage funds. In the case of the former, the fund manager constantly tracks the economic and market indicators and changes the asset allocation depending on his views on the future movement of the asset prices. However, these funds are risky as their performance depends on the skills and economic forecasting abilities of the fund manager.

As for the life stage funds, the fund manager aims to maintain an asset allocation that suits the investors of a particular age group. In order to achieve this, the fund constantly rebalances its portfolio. For instance, the investors in their 20s are subject to a 20:80 debt-equity ratio, which tapers down to 80:20 in their 50s. The life stage funds bring in investment discipline as they force the fund managers to strike a balance and alter investments periodically to stick to the ratio. While most people learn how to diversify their assets, they miss out on rebalancing. Such funds assure that a balance is maintained in order to make the investment work.