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Unsure about asset allocation? These funds will do the work for you

The funds work well as a core portfolio for investors who do not maintain the discipline of asset allocation, which plays a key role in determining portfolio returns.

, ET Bureau|
Updated: Nov 21, 2019, 11.26 AM IST
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long term investing
Financial planners are recommending asset allocation funds to first-time investors who want to start investing in equities as an asset class. They also work well as a core portfolio for investors who do not maintain the discipline of asset allocation, which plays a key role in determining portfolio returns.

“Winners among asset classes keep rotating largely because they perform based on market cycles. For example, equity markets tend to generally perform well in expansionary economies, while the debt market tends to generally perform well in contracting economies,” said S Naren, chief investment officer, ICICI Prudential Mutual Fund.

Naren believes an optimal shift of allocation among asset classes ensures a smoother investment journey, which can be achieved by retail investors through investing in asset allocation schemes.

As per a research paper “Determinants of Portfolio Performance II, An Update” published by Gary Brinston, Brian D Singer and Gilbert L Beebower, Financial Analysts Journal May-June 1991, it was found that allocation forms the key determinant for portfolio performance over a long run in 92% of the cases. The remaining was attributed to other factors, such as stock selection and market timing.

“First-time investors moving from fixed deposits to equities need low risk products. Asset allocation can form a core portfolio for such investors,” said S Shankar, founder, Credo Capital.

Asset allocation products, in which the equity component can vary from 0-100%, increase allocation to equities when the markets are low and vice versa. They work well for investors unsure about market direction.

“Many investors are not sure of which asset class to buy as they are unsure of where the markets are headed. Such players can buy asset allocation funds,” said Rupesh Bhansali, head (distribution), GEPL Capital. He recommends Franklin India Dynamic Asset Allocation Fund of Funds and ICICI Prudential Asset Allocator Fund.

Both these products are structured as a fund of funds (FOF) — a pooled investment fund that invests in other types of funds.

As of end October, ICICI Prudential Asset Allocator Fund has a 46.1% exposure to equity. The equity component is divided into ICICI Prudential Large & Midcap Fund (18.9%) and ICICI Prudential Bluechip Fund (27.1%), while the debt component is split into ICICI Prudential All seasons Bond Fund (13.5%), Floating Interest Fund (19.1%), Corporate Bond Fund (9%), Money Market Fund (9.7%) and Savings Fund (0.8%).

Franklin India Dynamic Asset Allocation Fund of Funds allocates its equity component to Franklin India Equity Fund, a multi cap fund, and the debt component in Franklin India Short Term Income Plan, an open-ended short-term debt fund.

Its equity allocation is decided on the basis of average P/E and P/B ratio of the Nifty 500 Index and currently it has a 46% allocation to equity. Since these are structured as a fund of funds, they are taxed as debt products. Investors who hold for three years will get indexation benefits, while those who hold for less than three years will have to pay short-term capital gains tax.
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