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Investment experts ask investors to always stick to their asset allocation plan and rebalance it at regular intervals to create wealth in the long term. However, most investors find it difficult to do the allocation as well as rebalancing on their own. They also find it difficult to hire a professional for the job for a variety of reasons: stiff fees, lack of access and the small size of the portfolio and so on. These make many look at asset allocation fund of funds. Multi manager asset allocation fund helps investors to invest in the best of the mutual fund schemes investing in various assets as per a pre-determined asset allocation. It also helps to track, continue with good investments and weed out underperformers. Though an asset allocation fund cannot replace the financial planning exercise completely, it still deserves a closer look.
WHAT are Asset Allocation Funds?
For the beginners, asset alloction funds are fund of funds schemes that offer to invest in other equity and debt mutual fund schemes based on a certain mix of equity and fixed income. An aggressive asset allocation fund invests in a combination of equity and fixed income; say 70% in equity and the rest in fixed income, through MF schemes; whereas a cautious asset allocation fund ensures that all the money is invested in fixed income schemes investing in low-risk instruments. Asset allocation funds are of two types — single manager and multi manager. A single manager asset allocation fund invests in MF scheme managed by one manager — read schemes floated by the same mutual fund house, whereas a multi manager asset allocation fund invests in mutual funds schemes across fund houses. Keep aside the given benefit, investing as per asset allocation, there is more on offer.
BENEFITS
A multi manager asset allocation fund makes more sense for the first-time investor, as s/he may not be conversant with the functioning of each product in the mutual fund space and further may not have adequate information to choose the best funds. And that is not the only reason. Multi manager funds allow the fund manager to invest money in the best of the class mutual fund schemes to offer optimum risk-adjusted returns for naive investors which may not be the case with a single manager fund where the fund manager may not have much options. But if you are comfortable with the investment philosophy of a particular fund house, you can also look at single manager asset allocation fund floated by that fund house.
Asset allocation funds also offer the much-needed asset rebalancing. Asset rebalancing helps investors to move money from risky assets to non-risky assets or the other way round at regular intervals\. If you are a long term investor and do not have time, resources or knowledge to efficiently track your investments, you run the risk of remaining invested in a dud investment.
A professional fund manager while rebalancing ensures your money remains optimally employed. There is one more benefit investors have to keep in mind. The shelter of one fund saves the investors from heavy taxation. If you try to actively rebalance or continuously keep weeding underperformers to invest in scheme better positioned to deliver, you may end up paying short term capital gains. This is especially true in case of savvy investors actively tracking their investments. Instead, remain invested in a good multi-manager fund for long-term and enjoy lower taxation.
Though you have to pay for this job, there are some areas where you may see lower expenses too. Asset allocation schemes can invest in 'institutional plans' of other schemes that come with lower expense ratio. Small investors have to invest in retail plans with comparatively higher expenses. Though there are benefits of investing in an asset allocation funds, one cannot ignore the downside too.
The fund manager must stick to the mandate given to him. Too much portfolio churn and stepping out of mandate for maximisation of returns can increase risks. You have to keep in mind that these products are generic in nature. There is a limit to customisation when you opt for an asset allocation fund.
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Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
- HDFC TaxSaver
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- DSP BlackRock Tax Saver Fund
- Birla Sun Life Tax Relief '96
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- IDFC Tax Advantage (ELSS) Fund
- SBI Magnum Tax Gain Scheme 1993
- Sundaram Tax Saver
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