One Minute Guide: Asset allocation funds2 min read . Updated: 24 Oct 2014, 08:08 PM IST
These are mutual fund schemes that invest across equities, fixed income or gold
Some mutual fund (MF) schemes invest across equities, fixed income or gold. Such schemes are typically called asset allocation or multi-asset funds.
These funds generally invest in just two asset classes. Classic examples of such schemes are balanced funds (these invest at least 65% in equities and the rest in debt) and monthly income plans (MIP; invest 80%-90% in fixed-income instruments and the rest in equity). While balanced funds are run like equity funds, MIPs are essentially debt funds that get a returns kicker from equity.
Asset allocation funds
Asset allocation or multi-asset funds are typically those that invest across all available asset classes. They invest in equities, fixed-income instruments as well as gold. How much they invest in each differs across schemes. For instance, some like Axis Triple Advantage Fund invest 30-40% each in all of the three assets. Others, however, like to manage their asset allocation dynamically. For instance, Religare Invesco Monthly Income Plan Plus invests 65-90% in fixed-income instruments, up to 25% in equities and 10-35% in gold exchange-traded funds. Of late, a new breed of such multi-asset funds has come in the market. Kotak Mahindra Asset Management Co. Ltd recently launched a monthly income type of a product where it invests in equity securities (it buys, holds and sells them like any other fund), fixed-income securities and also in arbitrage opportunities. For the purpose of taxation though, equity arbitrage is also considered as equity exposure.
What does the mandate say?
Various asset allocation funds have different objectives. Before you invest, you need to understand their philosophies, what these funds are meant to do and do they meet your expectations. Balanced funds are meant to give you equity exposure but with lower risk than a typical equity fund. So, while these invest at least 65% in equities (and, therefore, get counted as an equity fund), their overall equity exposure is limited, against 100% in a typical equity fund. Similarly, a monthly income type of a product aims to give you a regular income by investing substantially in debt instruments (to give you safety), while getting a returns kicker from a marginal equity exposure.
Balanced funds and MIPs are often recommended to those investors who want to limit the amount of risk a fund can take.
It’s advisable for investors to invest across assets in a certain proportion, depending on risk appetite. Conventional wisdom also says that when the stipulated portions of these assets get breached, re-balancing is required. Bust most of us don’t maintain this discipline. If a particular asset is rising, we feel content and don’t book profits till markets fall and we end up losing money. Multi-asset funds help us maintain asset allocation. Of course, you too can do this with the help of separate schemes; something that many financial planners suggest.