With the wide market swings, there is no way of knowing what the future holds in terms of performance across asset classes. Diversifying your portfolio with an appropriate mix of equity, debt and gold, among other investments, is imperative for your financial health. This process is called asset allocation. Asset allocation can even help mitigate the short-term effects of a market downturn and maximize your chances of achieving your financial goals.
DIY Asset Allocation
Investors preferring a hands-on approach to invest and looking for better control on their investment’s risk-reward outcome can manage their asset allocation themselves.
There are multiple variables to consider when we want to get our asset allocation done right.
- Asset class performance: All asset classes such as equity; fixed income and gold are cyclical and rise and fall depending on the macro & micro-market conditions.
- Portfolio Allocation: This refers to the percentage or the proportion needed to allocate your investments among the three asset classes. Portfolio allocation also determines the diversification necessary across market capitalization or investment style.
- Portfolio Rebalancing: The constant monitoring of the funds in which you have invested etc.
While prudent asset allocation is one way to mitigate market uncertainty, we need to understand that ideal asset allocation is not static.
Readymade Mutual Fund Solutions
So if you are one of those investors who are not sure which asset classes to invest in and how to keep up with these variables in highly uncertain markets, then readymade mutual fund solutions is another option to consider.
What are the 4 types of readymade mutual fund solutions?
Investors looking to diversify without the hassle of deciding on an appropriate asset allocation can consider these options:
Multi-Asset allocation fund: Multi-Asset Allocation Funds are hybrid funds that diversify your investment across asset classes such as equity, debt, and one more asset class such as gold, etc. Not all multi-asset allocation funds have a minimum of 65% equity as mandate. Some of the funds in this category can reduce their equity exposure. However, as a standard, they invest a minimum of 10% in at least three asset classes. Some funds may have static allocation for each asset class, while others may take a more market-driven approach.
Flexicap Fund: Investors looking to invest across market capitalization viz, large, mid and small-cap segments can look at flexicap funds that provide this option in a single fund. These funds can have varying allocation levels and could increase the proportion to a particular segment depending on market attractiveness.
Multicap Fund: As per SEBI regulation, these funds need to hold at least 25% each in large, mid and small-cap segment. This fund is suitable for investors seeking diversified funds across market capitalization while maintaining a structure related to these segments.
Dynamic Asset Allocation Fund or balanced advantage funds: These funds are ideal for investors seeking allocation to equity markets but with less risk than a pure equity fund. They are a blend with equity and debt segments based on specific pre-determined triggers and valuations such as P/E multiples. These funds generally reduce their equity allocation in bull markets and increase exposure to equities during bear markets or recession.
In conclusion, selecting a readymade portfolio diversification option or performing asset allocation hands-on, solely depends on the investor’s risk appetite, goals and investment tenure.
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