Asset Allocation Funds – Types, Benefits and Taxation
Asset allocation funds are essentially balanced mutual funds, wherein, investors put their money into both bonds and equities. Most seasoned investors often adopt the strategy of asset allocation to redistribute their burden of risk and to enhance their scope of earnings.
Like any other mutual funds, a professional fund manager deals with asset allocation mutual funds. They also track the market from up close and often come up with asset allocation strategies to suit the needs and requirements of the investors.
Main Features of Asset Allocation Mutual Funds
What set these funds apart from other types of mutual funds are their varied features and associated benefits. The funds work around the idea that increasing the percentage of one or more asset classes in an investment portfolio will help the investor to cushion the risks associated with a specific asset class.
Key features of asset allocation funds are listed below-
- Optimal ROI through investment in a diversified portfolio.
- The option to manipulate the asset-mix as per investor’s risk appetite and market conditions.
Different Types of Asset Allocation Funds
Asset allocation mutual funds are primarily of three types-
- Target-date Funds: This category of funds is typically managed with a specific mix of asset class which roll out with a high risk-reward concentration. The risk concentration tends to decrease gradually as it approaches the maturity date. These funds are also known as life-cycle funds and are commonly used for retirement planning.
- Dynamic Asset Allocation Funds: These funds tend to change the proportion of various assets in a particular investment portfolio. This tendency helps investors to cope up with the changes and fluctuations in the market forces. For example, if a particular asset class is expected to do well, increasing funds allocation towards that asset will have a favourable impact on returns and will enhance an investor’s overall portfolio.
- Static Asset Allocation Funds: In the case of these funds, a pre-fixed percentage is assigned to the various asset classes, right from the beginning. The said percentage indicates the proportion up to which investments will be made in that particular asset class. Balanced Funds are among the most popular types of static asset funds, which invest at least 65% of the total asset in equities and the remainder in debt funds.
Benefits of Choosing Asset Allocation Funds
The below-mentioned pointers make asset allocation funds a desirable investment option-
- Scope of diversification
The chance to diversify one’s portfolio makes this particular fund feasible for both inexperienced and seasoned investors. Asset allocation funds India is deemed to be a favourable investment option, especially for those investors who are looking for ways to minimise their risk burden. Through mutual fund asset allocation, investors can invest across various asset classes and expand their investment portfolio as per their needs.
- Control over market volatility
The investment market is a volatile space; one can never predict its next phase accurately. An asset class that has been lukewarm for some time may start to perform outstandingly, while another that has been offering high returns until now may undergo a sharp fall. Owing to such an unpredictable nature of the investment market, it is always a smart move to diversify one’s portfolio across various asset classes. Choosing a fund that invests in diverse classes helps an investor to cushion the blows of the volatile market. It also ensures them a steady income irrespective of market forces.
- Better earnings
It is the returns on investments that motivate people to invest. When one opts for asset allocation funds, they also improve their chance of earning better returns on their investment. The fact that the portfolio of an asset allocation mutual fund investor is exposed to different asset classes works in their favour and ensures them higher returns. For example, if the debt portion of the funds is underperforming or yielding negligible returns, an investor will still be able to earn more than an all-debt fund investor. The reason being, the earnings from other asset classes will make up for the loss.
Who should Invest in Asset Allocation Funds?
The diversification feature of the funds makes asset allocation funds a good investment option for those investors who do not have a strong risk appetite.
Though everybody wants to earn higher returns on their investments, they may not be equipped to handle the risks that come along with such high yielding investment options. Asset allocation mutual funds help investors to achieve a balance between risk and reward. The equity portion helps investors to beat the effects of inflation, while the other portion cushions the risks that are associated with investing in equities. For example, balanced funds invest at least 65% in equities and the remainder in others, while Monthly Income Plans or MIPs put away 15% of total assets in equities and the rest in other investment instruments.
In this way, the said mutual fund asset allocation help risk-averse investors to meet an ideal balance of risk and reward, where they can enhance their earnings without increasing the burden of associated risks.
Taxation for Asset Allocation Funds
Like other mutual funds, asset allocation funds are also subjected to taxation. For these funds, the taxation is similar to that of debt funds, as the majority of them are Funds of Funds. The short-term gains earned on these funds are included in the income and then taxed in accordance with the investor’s tax slab. For long-term gains of over three years, tax is levied at the rate of 20% with indexation.
One should also remember that the tax structure for bonds, debt mutual funds and fixed deposits are not the same. Investors need to be familiar with the different tax structures of both debt and equity class to be able to chalk out a portfolio and balancing its taxes effectively.
Factors affecting Asset Allocation Decisions
One should consider the following pointers before investing in top asset allocation funds India has-
- Cost: Not all asset class cost the same; some classes cost more than others, while most come with additional charges. Before investing in any asset allocation funds, one should find out about the additional charges, fixed fees, performance incentives and other charges that may be associated with them.
- Portfolio management: Keeping a track of illiquid stocks is hard, especially on a regular basis. It is advisable to learn a trick or two of portfolio management with particular regard to illiquid stocks.
Besides the above factors, age, risk appetite, net worth, financial goals and market factors should also be taken into consideration before investing.