Readymade yet flexible financial plans

Readymade yet flexible financial plans

If you can’t afford customised asset allocation, you can still plan investments across asset classes via convenient and cost-efficient funds of funds

Acoffee snob will buy expensive beans, roast, grind and percolate water to create a special brew. Somebody in a hurry may just pour hot water onto instant. And, you may also opt for a latte, or mocha, or expresso, sourced off the nearest cafe menu.

The instant-drinker is like an “accidental” asset allocator; he vacillates until it is tax time and then opts for the nearest taxsaver. He ends up with insurance endowments and other sub-optimal “investments”.

The connoisseur plans the asset mix in advance, consults financial planners and does due diligence before dividing assets.

The cafe drinker is like a Fund of Fund (FoF) investor; he wants quality but he’ll settle for an off-theshelf product rather than break his head seeking perfection.

The basics of asset allocation are: Figure out goals over time, assess your risk appetite and invest across asset-classes such as debt, equity, real estate, bullion, etc. If you’re young, carry a larger equity allocation. If you’re close to retirement or past it, debt is alluring.

As prices twitch, asset weights change and you need to rebalance. For example, you may start with a 40:60 proportion in equity and debt. In a bull run, the equity allocation rises disproportionately. Rebalance by selling some equity to restore the original 40:60 proportion.

Sunil Rajashekar, 30, a consultant with Accenture, has a nearideal allocation for his age and riskprofile. He invests around 70% of his savings in equities. Says Rajashekar: “I don’t have many liabilities at this stage. This gives me the opportunity to take on higher risk to make higher returns. When family responsibilities increase, I will gradually increase allocation to safer options.”

If you don’t want to do it yourself, or you are reluctant to pay for financial consultations, consider a fund of funds (FoF).

An FoF is a mutual fund scheme that invests in other mutual fund schemes. Thus, a single FoF holds a basket of schemes with the equity: debt proportions dependent on the mandate. There is only one folio and just one NAV to track.

The biggest advantage of an FoF is that it is both tax-efficient and low-cost. Raghavendra Nath, vicepresident, marketing and strategy, Birla Mutual Fund, explains: “If you rebalance holdings, you may be liable to capital gains tax and you must bear entry/exit loads and brokerage. FoFs are exempt from capital gains tax and negotiate loadexemptions as major investors.”

Proprietary FoFs invest only within their own asset management company. But there are also “multi-manager” FoFs that only invest in mutual fund schemes from other fund houses.

FoFs can be either static or dynamic in their asset allocation. Static FoFs maintain rigid allocations and the investor can pick a debt:equity ratio that suits them.

There’s a wide choice of static FoFs. Birla offers conservative, moderate and aggressive ratios. The Franklin Templeton Life Stage FoF series is geared to investor lifecycles. The FT scheme for 20s has a high 80% equity allocation and this is gradually reduced in favour of more debt for older investors.

Dynamic FoFs aren’t committed to allocations. They switch between equity and debt freely, changing allocations to react to market conditions. Most use complex quantitative techniques.

The downside of dynamic allocation is that rebalancing based on market movements can distort allocations unpredictably. You may end up with a risk profile that you find distinctly unsuitable.

But a multi-manager FoF is a readymade financial plan, much like a latte. It may not measure up to freshly brewed Jamaican Blue Mountain. But it delivers an acceptable risk: return profile and better returns than accidental allocation.

FoFs haven’t been around long. Long-term track records don’t exist and the short-term returns are okay without being earth-shaking.

However, FoFs are logical, convenient and flexible instruments. If you look at this type of instrument, you will surely find schemes to fit your allocation needs.