Understanding Asset Allocator Fund
By Akhil Chugh
Date January 8, 2023
Every few years, a different asset class emerges as the top performer. Whether it is equities, debt or gold, all asset classes go through purple patch periods and also times when they were miserably out of favour. Allocation towards the right asset class is a key determinant for portfolio performance over the long run.
A category of Mutual funds called ‘Asset Allocator Fund’ seeks to manage portfolios with a combination of different schemes. The idea is to pick and choose a combination of schemes investing in different asset classes in such a way that the portfolio gives steady returns in all market conditions.
What is Asset Allocator Fund?
It is an open-ended ‘fund of funds’ investing in equity-oriented, debt-oriented and gold ETF schemes. So, the underlying holdings are mutual funds instead of stocks. The Fund follows a systematic and process-driven asset allocation approach based on the financial model.
Asset Allocator Fund can invest in in-house funds or funds managed by other asset management companies. The rationale behind using different asset-focused mutual fund schemes rides on the fact that each asset behaves differently during various economic phases. So, pick and choose a combination of mutual fund schemes as per the economic and market situation to give steady returns.
How does Asset Allocator Fund work?
Just like food items of differing nutritional value can be combined together to ensure the health of the human body. When investing, investors can combine different asset classes in order to ensure the health of their portfolio. Asset Allocator Fund is an auto re-balancing fund of funds that allocates investors’ money in equity, debt and gold schemes based on valuation to give investors optimal returns.
- Equity – aims to provide growth to an investor’s portfolio
- Debt – aims to provide stability to an investor’s portfolio
- Gold – aims to act as a hedge against inflation and currency depreciation
The scheme usually increases its allocation to equity schemes (decreasing debt & gold) when the valuation is low and reduces equity allocation (increasing debt & gold) when the valuation is high. Combining assets with low correlation can limit the downside risk and offer the opportunity of generating optimal returns.
Investors can aim for the right allocation to the right asset class at the right time by investing in Asset Allocator Fund.
How is Asset Allocator Fund taxed?
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.
Benefits of Asset Allocator Funds:
- Delivers the benefit of the right allocation at the right time in the right asset classes
- Fund gives exposure to a multi-fund manager’s expertise
- Model-driven approach can take care of allocation “horizontally” (across asset classes and “vertically” (across large, mid and small caps).
- Aims to generate risk-adjusted returns.
- Debt taxation with indexation benefits.
Net Brokers Takeaways:
- In the current volatile market conditions, Asset Allocator Fund is a good fund for moderate risk-takers to beat market volatility.
- Investors should have a long investment horizon (3 to 5 years or longer) to get the benefit of indexation.
- Asset Allocator Fund is a 1-stop solution for meeting asset allocation needs with a combination of negatively / low correlated assets diversifying the portfolio.
Asset Allocator Fund is a smart & easy way of diversifying your portfolio. It is an all-rounder fund that can start your journey toward your financial future.
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