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Asset Allocation Funds

Mutual funds that make investments across different asset classes are known as asset allocation funds. They are balanced mutual funds that invest in a combination of equities and bonds. Asset allocation funds offer investors a diversified investment portfolio across various asset categories which include bonds, stocks, etc. Based on the investment objective of a mutual fund scheme, the assets are allocated by a fund manager who tracks the investments and makes changes in the asset allocation according to the performance of the assets in the market.

Asset allocation funds are ideal for conservative investors who have a low tolerance for risk as these funds mitigate the risks through diversification. They are similar to hybrid funds but in terms of allocation of assets, they are more actively managed. Asset allocation funds are designed to make adjustments in the asset allocation based on a formula or change in the way the fund manager perceives the market conditions.

Types of asset allocation funds

Broadly classified, asset allocation funds fall into two categories:

  • Dynamic asset allocation funds
  • Static asset allocation funds

Dynamic asset allocation funds – This category of funds makes alterations or adjustments in the proportion of assets based on the fluctuations in the market. There has been a recent rise in the number of investors in dynamic asset allocation funds as they are looked upon as an alternative to the traditional fixed deposits. When markets become expensive, these funds reduce their equity exposure and increase their exposure to debt and arbitrage. Doing this puts a check on the downside risk that may happen when the stock market crashes.

Static asset allocation funds – These funds allocate a pre-decided percentage to different asset classes. Balanced funds are the best example of static asset allocation funds which invest a minimum of 65% of its corpus in equities and the remaining in debt securities.

Benefits of investing in asset allocation funds

  • Asset allocation funds offer diversification to the investor and minimises the risk that comes with investing in pure equity or pure debt mutual funds.
  • Since these funds invest across various asset classes, it can be used to overcome the volatility in the market. Even if one asset does not perform well, it can be balanced out by the good performance of another asset class.
  • Since these funds expose the portfolio of the investors to different asset classes, the returns are enhanced.

Tax implications of asset allocation funds

Asset allocation funds are taxed as debt funds and so, short-term gains from these funds are added to the income and are taxed according to the tax slab applicable to the investor. Long-term gains (units held for more than 3 years) will attract a tax of 20% taking indexation into account. This causes a reduction in the capital gains as a result of which there is a reduction in the amount of tax to be paid. This makes the asset allocation funds a tax-efficient investment vehicle.

Best asset allocation funds (based on past returns)

Name of the Fund 1-year Returns 3-year Returns
HDFC Balanced Advantage Fund-Direct-Growth -3.69 14.79
HDFC Balanced Advantage Fund-Growth -4.82 13.54
Aditya Birla Sun Life Balanced Advantage-Direct-Growth 1.23 13.48
Reliance Balanced Advantage Fund-Direct-Growth -1.14 13.42
ICICI Prudential Balanced Advantage Fund-Direct-Growth 3.08 12.48
Aditya Birla Sun Life Balanced Advantage-Growth 0.08 12.39
Franklin India Dynamic PE Ratio FoF-Direct-Growth 5.82 11.55
Invesco India Dynamic Equity-Direct-Growth -3.16 11.54
SBI Dynamic Asset Allocation-Direct-Growth 7.83 11.26
ICICI Prudential Balanced Advantage Fund-Growth 1.90 11.03

Please note that past returns are not indicative of the fund’s future performance.

GST rate of 18% applicable for all financial services effective July 1, 2017.

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