How to do asset allocation when investing in mutual funds?

The advantage of investing in a mutual fund (MF) is that an investor gets a diversified portfolio ready to use and also managed by professional fund managers. Thus, MF investors do not have to worry about reducing investment risk through diversification.

To know the suitability of a fund for achieving his financial objectives, an investor must however carry out appropriate financial planning to determine the amount to invest and the level of risk to take.

“Each category and sub-category of mutual funds occupies a distinct place on the risk-return spectrum. You should fully understand the plan’s investment mandate and its risk-return characteristics. Choose plans that match your risk profile, investment objective, time horizon and are best suited to respective financial goals,” said Rina Nathani, Commercial Director of Quantum AMC.

To keep pace with rising prices, one may have little choice but to take some market risk and invest in stocks methodically.

“As inflation is on the rise, achieving efficient inflation-adjusted returns (also known as real returns) is essential. Thus, it would be wise to broadly follow the proven asset allocation model 12 -20-80, a simple solution for all your investment needs,” said Nathani.

So even when investing through mutual funds, asset allocation can still be done to further reduce market risks.

“Deploy 12 months of regular expenses (including EMI on loans) into a separate savings account and/or liquid fund (which will support your emergency needs). Hold approximately 20% of the entire portfolio in gold (via Gold Funds or Gold ETFs) with a long-term view allowing you to hedge your portfolio and act as a store of value. And the remaining 80% of the portfolio invests in various sub-categories of equity mutual funds, which will potentially help you fight inflation and achieve your intended financial goals. This asset allocation strategy could potentially provide your portfolio with the right mix of stability, growth and protection,” Nathani said.

Michael J. Birnbaum