Asset Allocation Funds

Mutual funds are a great investment avenue for those who wish to gain from capital appreciation. The performance of mutual funds depends on market forces, which deters many beginner and risk-averse investors from parking their funds in these schemes. 

However, such investors can opt for asset allocation funds as they follow a balanced investment approach to reduce the associated risk. 

Since hybrid mutual funds also invest in more than one asset class, you may be wondering what is an asset allocation fund. These are a type of hybrid mutual funds that invest in varied asset classes, including equities, debt, and commodities like gold. 

 

These funds do not have a specific ratio regarding exposure toward various asset classes, which can be adjusted as per market conditions.

Now that you have understood the meaning of asset allocation funds, you must also know the various types of schemes available before investing. 

Target Date Funds

Also called life-cycle funds, these funds are structured with a targeted mix of asset classes and are best for retirement planning. While they start out with a high-risk return position, they move towards less risky instruments towards the end of the investment horizon.

 

Dynamic Asset Allocation Funds

As their name suggests, these funds are dynamic in fund allocation and keep changing the asset class mix based on market fluctuations. In simple words, they increase the allocation in a particular asset class when it is expected to perform well in the future. 

 

Static Asset Allocation Funds

These funds have a predetermined proportion of fund allocation for different asset classes. The most popular type of these funds are balanced asset allocation funds, which have 65% exposure towards equities.

Depending upon the investment mandate, asset allocation funds spread your investment across different asset classes. A fund manager controls the allocation of funds, tracks its performance, and makes necessary changes as per market performance. 

 

While allocation towards equities fetches you higher returns, there is a higher risk associated with them. On the other hand, debt and money-market instruments provide a fixed income while minimising the risks. 

 

Based on this, fund managers try to opt for a balanced investment approach with these funds. Thus, you can gain from capital appreciation through equities and hedge market risks through fixed-income instruments. 

Here are some of the perks of investing in asset allocation funds:

• Diversification

Since these funds invest in different asset classes, they allow you to diversify your portfolio. 

• Hedge Against Volatility

While equity securities are linked with market forces and are volatile, these funds allocate funds towards other asset classes, which reduces risk exposure.

• Enhanced Returns

These funds offer better returns by exposing your portfolio to different asset classes. 

The following are some of the drawbacks of investing in these funds:

• Taxation

It is difficult to balance the taxation structure as different asset classes have different taxability. 

• High Cost

Some asset classes, like real estate funds and private equity funds, have considerably high costs. 

• Portfolio Monitoring

The tracking of some illiquid asset classes can be very difficult, making portfolio monitoring a challenge. 

Having understood what an asset allocation fund is and the benefits as well as drawbacks it comes with, you can make your investment decision. Consider the following factors before you proceed:

• Cost

Different asset classes have varied expense ratios, additional charges, fixed fees, and other charges, which you should consider. 

• Portfolio Management

Since it is difficult to track illiquid assets, you must consider their cost and implications as you manage your portfolio. 

• Taxability

Consider taxation, which includes taxes as per your slab for short-term gains and taxes as per your tax slab for short-term gains. 

Asset allocation funds are specifically meant for risk-averse investors or those getting started on their investment journey. While equities provide higher returns, they carry higher risks, too, as their returns are linked with market performance. 

 

This deters many risk-averse investors from investing in equity-based mutual funds. However, such investors can opt for asset allocation funds to generate higher returns while minimising the associated risks with fixed-income instruments.

 

Choose an asset allocation fund if you wish to follow a balanced investment approach and hedge your investment against risks. These funds provide exposure to a mix of stocks, bonds, commodities, and real estate. 

 

Thus, you stand to gain from capital appreciation, income generation, and diversification at the same time. Invest in these mutual funds as well as a range of other schemes with ease on Bajaj Markets.