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Should you invest in ICICI Prudential Asset Allocator fund?

Excess cash with banks averaged Rs39,700 crore ($6.2 billion) last week, compared to a peak of more than 5 trillion rupees in March, according to Bloomberg Intelligence India Banking Liquidity Index. Photo: Hemant Mishra/MintPremium
Excess cash with banks averaged Rs39,700 crore ($6.2 billion) last week, compared to a peak of more than 5 trillion rupees in March, according to Bloomberg Intelligence India Banking Liquidity Index. Photo: Hemant Mishra/Mint

The allocation may depend on age, risk appetite and consistency of income. Research has time and again shown that asset allocation is the key determinant in robust portfolio performance over long term

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Do not put all your eggs in one basket is an old adage amplifying the importance of diversification. Various asset classes perform differently during different time periods. Looking at this fact it is necessary for investors to diversify and rebalance their investment portfolio periodically. In this article I wish to discuss the importance of diversifying and rebalancing and the way to do it. 

What is diversification and rebalancing of your portfolio and why it is important 

Since various assets classes like equity, debt and gold perform differently during different time period and may see huge volatility as well as extended period of consolidation phase, it is prudent for retail investors to do an asset allocation for their portfolio and invest across various asset classes. The allocation may depend on age, risk appetite and consistency of income. Research has time and again shown that asset allocation is the key determinant in robust portfolio performance over long term. 

Apart from proper asset allocation what is equally important is periodic portfolio review and rebalancing as and when required to restore the desired asset allocation. Also, an ideal asset allocation for an investor is not static in nature. It undergoes change over the years as the investors’ profile changes. The changes in market conditions may also call for a review of asset allocation. In the long run, proper asset allocation and rebalancing tends to reduce portfolio volatility thereby aiding investors to optimize overall portfolio returns.

Why retail investors often fail in diversifying effectively and efficiently

While it is easy for an investor to invest across asset classes separately, but timely reviewing and rebalancing becomes a challenge due to being preoccupation with his/her vocation. Moreover, an average investor may not be aware of the various factors at play when it comes to equity market or the macro economy. Hence, taking a call on rebalancing, which asset class to enter or exit becomes a tough decision to make. It may also be noted that rebalancing every buy or sell transaction attracts transaction costs and tax liability on the profits realized. 

How to go about it?

For a lay or risk averse looking for optimal allocation across asset classes can consider the various hybrid funds offered by the fund houses. Within hybrid there are various categories such as Aggressive Hybrid Fund, Conservative Hybrid Fund, Balanced Advantage Fund and Multi-Asset Allocation Fund. These hybrid schemes have to adhere to SEBI specified limits when it comes to investing in various asset classes. 

An Option Worth Considering 

Among the various asset allocation category schemes, one of the schemes with a robust track record is the ICICI Prudential Asset Allocator Fund of Fund. The fund invests in three asset classes through mutual fund schemes of equity, debt and gold and does rebalancing periodically based on an in-house equity valuation index. This index is calculated basis four ratios – price to earnings, price to book, G-Sec*PE and Market Cap to Gross Domestic Product, each having equal weight. 

The fund manager relies on the signals of this index to decide as to when the market is overheated and profits need to be booked and vice versa. This ensures there is no human bias involved in decision making. Historic data shows the approach followed has aided in investing in the right asset class at the right time. Since the portfolio rebalancing is done at a fund level, there is no tax implication for the investor. 

Since the portfolio is diversified across asset classes the volatility associated tends to be minimal. The standard deviation of the fund is also lower than that of the Nifty 50 index. As the scheme is permitted to take 100% exposure in any asset class, the fund manager has freedom to take call to go overboard on any particular asset class at any given point of time to optimize the returns of the scheme. 

Taxation Aspect

Since ICICI Prudential Asset Allocator has a Fund of Fund structure and invest in equity and debt schemes, the scheme does not qualify as an equity oriented scheme. Therefore, you need to hold your investment in this scheme for 36 months or more to be eligible for availing the benefits of indexation and concessional flat rate of 20% on capital gainsSince benefit of indexation is available on cost of acquisition, the effective tax rates tends to be far lower than 20%. In case you liquidate your investment before 36 months, the profits will get taxed at your slab rate.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on twitter.

 

 

 

 

 

 

 

 

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