Investors should have a good mix of actively managed Equity funds, Debt funds, and index funds or ETFs. One of the ways we recommend investors to approach asset allocation is with the solution based WITS model.
Don’t put all your eggs in one basket – goes the old adage or advice often quoted. Simply put, it means that one should not deploy all resources in one area.
It is in a way the same approach we have seen our parents take while building a savings corpus. Some money in the bank, some in the locker, some inside a drawer, and some more may be in a secret jar inside the kitchen.
The central idea being diversification. In investing, given most asset classes are subject to market risks or certain external factors, this diversification also means diversifying the underlying market linked risk of any asset category.
Asset allocation is the all-season mantra in investing and the bedrock of financial planning. One of the important financial tools available to investors are mutual funds.
Mutual funds have over the last 25 years evolved, and have grown to cater to various goals, needs, and risk appetite of investors.
Why is asset allocation important?
Asset allocation can help one weather turbulent times or market volatility. The various asset classes behave differently at different points of time with one asset class delivering good performance while the other asset class experiencing a downturn, and vice versa.
Hence, asset allocation helps you to protect your investments and help you benefit from the performance cycles of the asset classes.
How to approach asset allocation?
Investors in a normal scenario use mostly equity schemes of mutual funds to invest. But equity schemes can go through extreme market fluctuations and if you have all your money in only that asset class, while in a bull market you will get significant gains, during market downturn you will face the opposite.
While equity is meant for the long term and the SIP mode of investing helps to average out gains and losses over a period of time, one should never ignore one asset class over the other.
Investors should have a good mix of actively managed Equity funds, Debt funds, and index funds or ETFs. One of the ways we recommend investors to approach asset allocation is with the solution based WITS model:
Wealth Solution (Equity Funds):
These are equity schemes meant for wealth creation over the long term across market caps. Investors can choose from a range of Large Cap, Multi-cap, Mid, and Small Cap Funds.
You can use value-added products to add more power to your SIPs with these. There’s Step-up SIP that helps you incrementally increase the SIP amount, Systematic Withdrawal Plan (SWP) through which you can have payouts at regular intervals as per need, and SIP with free insurance cover such as our Century SIP.
Income Solution (Fixed Income Funds):
There are various types of schemes within fixed income funds based on their duration and credit profile. Fixed Income funds such as Low Duration Fund, Banking & PSU Debt Fund, Corporate Bond Fund, Ultra Short Duration Fund, etc. fall under this category.
These funds aim to generate stable returns through the interest earned by investing in government securities, debentures, corporate bonds, and money market instruments.
Tax Solution (ELSS):
The Equity Linked Savings Scheme or ELSS is meant for tax savings purposes and has a three year lock-in period. This can be a good category for first-time investors to grow the habit of investing at regular intervals.
Savings Solution (Liquid & Overnight Funds):
These types of funds can be used to park one’s surplus income or idle money sitting in the account to generate decent returns on their savings. The nature of these schemes is such that they invest in very short term maturities providing easy liquidity.
If each of these solutions is used in the right manner as per one’s goals it will provide a better experience to investors through different market cycles.
Even we use the same solution-based approach to categorise and simplify our products keeping in mind the needs of the retail investor. For any assistance, you can speak to your financial advisor for further guidance.
While markets will go through its motions, if one carries a long-term focus on wealth creation and concentrate on asset allocation without being influenced by either fear or greed, there is meaningful gain to be made from mutual funds.
It will continue to be one of the best vehicles to invest in the market, providing a comprehensive solution to investor needs based on their financial goals and risk appetite.
(The author is MD and CEO, Aditya Birla Sun Life AMC)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.