There are countless others in India with a similar story. One of the major reason is that no one knows which asset class will perform in a given year. For example in 2008 gold funds with returns of 25.04%, followed by Debt Gilt Medium & Long Term funds with 24.20 were the best performing category. Whereas in 2009 the top spot was taken by equity mid & small-cap funds. (Refer table: Category Performance Yearly)
Therefore, the big question that any investor has is what percentage to invest in equity and what percentage to place in debt? The second perennial question for any investor is, when to book profits or when to change the allocation level with tilt towards equity and when to move into debt?’
The answers to these questions would be to invest in an asset allocation fund. Nilesh Rokadia, a Mumbai based IFA says, “Asset allocation funds are schemes which are designed such that it automatically adjusts the equity-debt allocation of a fund, either due to a formula or due to change in the fund manager’s perception of the economic environment.” He further explains that it is a kind of hybrid fund but it’s more dynamically managed in terms of asset allocation when compared to a balanced fund or monthly income plans (MIPs).
Good, Bad and the Ugly
“There are enough studies to suggest that more than 90% of the returns will be determined by the asset allocation that you have, and rest from stock or bond picking skills,” says Ajit Menon - Executive Vice President, Head of Sales and Co-head Marketing. An asset allocation fund takes care between equity and fixed income based on various parameters depending upon how the investment strategy has been designed.
Even these funds are not without flaws, as Lakshmi Iyer, Chief Investment Officer of Debt and Head of Products at Kotak Mahindra Asset Management Company says, “Right now in the current market scenario the negative for an asset allocation fund would be that they qualify for the classification of a debt fund on the tax front. So one has to remain invested in the fund for at least three years.”
Not everyone considers the tax inefficiency as a problem. Menon says, “Investments in such products should be made for a period of 5 years or more, the idea with such products is that an investor need not time the market but keep investing for his goal.” He believes that the problem is that most often the AMCs are investing in their own funds and hence the investor faces the risk of concentration style of an AMC.
“The problem with asset allocation is that there are too many variety and style but very few these funds have a history. So understanding the way various metrics function and asset allocation for the fund is decided is also important,” says Rokadia. He opines for an investor perhaps it’s a good option to invest in few different types of asset allocation funds to bring true diversity of style to the portfolio.
Data Courtesy:
Value Research
Performance of Asset Allocation funds
Menon of DSPBR says, “It is very difficult to judge a products in based on only one bull cycle or bear cycle. A product’s robustness should be measured over at least two full cycles.”
Though currently there are 10 funds that can be classified as asset allocation funds. As a category these are new class of funds, prior to 2010, there were only four funds following the approach of asset allocation in a dynamic way.
Among the ones with history, Franklin India Dynamic PE fund is more renowned. If we look at the performance of this fund, which has 10 years of history and compare it to the AMCs flagship equity fund (Franklin India Bluechip) and the flagship fixed income fund by the AMC (Franklin India Short Term Income Plan), then it is quite clear that though Franklin India Dynamic PE was not gaining as much as the equity fund but it did protect the portfolio in the down market of 2008 and 2011 massively. (Refer: A decade of performance & growth of Rs 100)
ELEMENT: Performance of Rs 100 -- Had an investor invested Rs 100 in the three funds in 2004, it would have grown
Should Investors invest here?
Rohit Shah, Founder & CEO at Getting You Rich believes, “The asset allocation to financial planning is like oxygen to human life. The asset allocation decisions involve judgement calls.” He opines that there are a number of factors the current asset allocation, risk profile, overall financial goal priorities and market situation that goes into account while assigning allocation level to each asset class, such unique aspect of an individual’s requirement is not taken care of by just an asset allocation fund.
Lakshmi Iyer of Kotak AMC says, “For a self-help investor who doesn’t want to do the asset timing and cannot give time to taking the decision on asset allocation level but still wants to have a financial market exposure then an asset allocation fund is a better choice; which does this active asset allocation.”
Meanwhile Menon of DSP Black Rock says, “We believe for first time investors with less risk appetite, it is one of the best instruments for investments. And it should be made the core of the portfolio at the time. With time as the investor becomes more comfortable with the business cycles and other products then the investor should add the other funds to their portfolio.”
Asset allocation funds with different strategies
Birla Sun Life Asset Allocator Multi-Manager FoF Scheme: This fund invests in mutual funds schemes across AMCs including funds from Birla Sun Life AMC.
Investment strategy: The asset allocation and the fund choices is decided by the Multi Manager Investment Team after looking into four factors: (1) Price/Earnings Ratio relative historical averages. (2) The relationship between Earnings Yield (P/E inverted) to 10 Year Bond Yield relative to historical averages. (3) Institutional flows (Foreign Institutional Investments inflows and domestic inflows) to local equity markets. (4) And RBI monetary policy stance in conjunction with the slope of the yield curve
Principal Smart Equity Fund: The fund invests’ directly into stocks based on various PE band.
Investment strategy: The fund will decide on allocation into equity assets based on equity market Price-to-Earnings Ratio (PE Ratio) levels. The PE Ratio has traditionally been used as a tool to assess whether the equity markets are cheap or expensively priced.
Franklin India Dynamic PE Ratio Fund of Funds: It’s a fund-of-fund which primarily invests in the schemes of Franklin Templeton based on specific PE band.
Investment strategy: Will invest in Franklin India Bluechip Fund (equity) and Franklin India Short Term Income Plan (debt). If the invested amount forms the corpus of more than 20% of the Bluechip or Short Term Income Plan then it shall invest in Franklin India Prima Plus (equity) and Franklin India Income Opportunities Fund (debt).
HDFC Dynamic PE Ratio Fund of Funds: A fund of fund that HDFC inherited this fund when it purchased Morgan Stanley funds.
Investment strategy: This also follows the fund-of-fund structure but the band that decided on the equity-debt asset allocation is based on the 1 year forward PE ratio as per the Bloomberg Consensus estimate of CNX Nifty. The scheme’s investment in any underlying scheme shall not exceed 20% of the net assets of that underlying scheme.
DSP BlackRock Dynamic Asset Allocation Fund: This is also a fund of fund, the asset allocation rates is decided by comparing the yield rates.
Investment strategy: In this fund the asset allocation will be decided based on the factor that would be used for determining the asset allocation is the yield gap ratio, which is the ratio of debt market yield to equity market yield. Based on this yield gap ratio the AMC has defined the asset allocation level.
ICICI Prudential Equity Income Fund: This fund is also an asset allocation with focus on keeping itself equity oriented for tax-benefit at all times.
Investment strategy: In order to maintain the equity benefit, the fund will maintain a minimum of 65-75% in the equity through a mix of equity and equity arbitrage. And the rest of the investment will be in debt fund. Its asset allocation level is based on P/BV model.
P.S. This is the submission draft. The actual story had appeared in March 2015 issue of Money Today. To read the final version. Click here or copy paste the given below link - http://businesstoday.intoday.in/story/asset-allocation-funds-ideal-for-investors-wary-of-market-conditions/1/216474.html
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