Asset allocation: Investors beat volatility with asset allocation MFs

(This story originally appeared in on May 03, 2021)

MUMBAI: Extreme volatility in recent months in the three most popular asset classes for common people — stocks, bonds and gold — has prompted investors to lap up asset allocation funds. These mutual funds divide investors’ money in a judicious manner among the three asset classes.

The funds also try to provide protection from extreme volatility in the prices of these assets. Financial planners say these funds have historically given higher returns than fixed deposits (FDs), but at a lower risk.

Consider this: In the one year to March 2021, total assets managed by these funds jumped nearly 47 per cent to Rs 15,551 crore. Investments in asset allocation fund of funds too grew, at an even faster rate of 61 per cent, to Rs 11,475 crore, official data showed. In comparison, the total assets of the fund industry grew by 41.4 per cent to Rs 31.4 lakh crore.

Financial planners say with the market uncertainty rising, the importance of asset allocation funds has gone up. “A proper asset-allocation strategy helps investors to ride the volatility better. Such a strategy usually helps investors earn more than pure fixed income assets (bonds, FDs, etc)…it helps reduce portfolio risk substantially,” said Etica Wealth Management MD & CEO Gajendra Kothari. “And by taking the mutual fund route, one could adopt the same strategy at a lower cost and in a tax-efficient manner,” Kothari said.

HDFC Mutual Fund’s senior fund manager Amit B Ganatra manages the company’s Asset Allocator Fund of Funds — the NFO for which closed on Friday. He said the scheme would aim to generate capital appreciation by managing the asset allocation between equity-oriented, debt-oriented and gold ETF schemes.

“The fund aims to follow a systematic and process-driven approach to asset allocation with the help of financial model based on valuation parameters. The idea is to dispassionately manage an active asset allocation strategy in a disciplined manner with periodic review and rebalancing, which otherwise becomes a challenge for investors,” Ganatra said.