Asset allocation is an important aspect of each investor?s financial planning. As one?s age advances, the risk-taking ability undergoes changes. Typically, it falls with advancing age. However, there are times when you have to change your asset allocation as markets move in a particular direction, defying the fundamentals and making particular asset classes risky or throwing some golden opportunities to grab another.

More often than not, risk-averse investors find it difficult to manage their asset allocation in volatile markets. Though financial planners admit that one should not actively move between asset classes just because the markets are volatile, there are instances where you need to take a call.

There are many ?fund of funds? that take care of the different life stages. Mutual funds and life insurance companies offer such arrangements in their existing products that take care of your varying risk profile. Life stage funds are very much popular in developed markets and have been doing extremely well for some time in India. These products ensure that you get a ready mix of funds that address your needs.

However, there are instances where due to temporary heating an asset class becomes riskier, and such life stage funds have little to offer. It becomes all the more important to ascertain how hot the asset class is. And it becomes difficult to take a decision keeping one?s emotions aside. There is a need of a valuation tool or some benchmark to decide when to move in and out.

There are a couple of such funds that are being offered and investors who are in a dilemma can consider these schemes. The first came from UTI mutual fund. UTI Variable Investment Scheme – Index Linked Plan was launched in November 2002. The fund offers to invest in a judicious mix of equity and debt. The level of the Sensex ascertains the mix of debt and equity. If the Sensex is below the 11,200 level the maximum equity allocation will be 90% and maximum debt allocation can be 30%. With the Sensex above 15,200, the equity allocation will shrink to maximum 30% and debt allocation will rise up to 90%. Simply put, as the Sensex advances, the equity allocation falls and debt allocation goes up.

One must admit that taking into account the current scenario it is really difficult to expect a lower level of Sensex below 15,000. And hence the fund may have to continue with the current asset allocation. In the last one year the fund has delivered 20%, whereas the Sensex has delivered 53%. One must admit that the returns posted by the funds are good, taking into account the asset mix it has.

The second offering similar to one we just saw comes from Franklin Templeton in the form of Dynamic PE Ratio Fund of Funds. This fund invests the equity component in the Franklin India Bluechip Fund (FIBCF), which invests primarily in large cap stocks. The debt component is invested in Templeton India Income Fund (TIIF), which primarily invests in government securities, PSU bonds and corporate debt.

The asset allocation between the debt and equity is a function of the weighted average PE ratio of the NSE Nifty. If the weighted average PE of the Nifty falls below 12, the equity allocation will be 90-100%. If the average PE of Nifty is above 28, the equity allocation will be 0-10%. The mechanism ensures that as the equity market heats up, the equity allocation will gradually go down. As on November 2007, the equity allocation of the fund stood at 30% and the rest was into debt.

Experts reckon that the fund has well defined the mechanism of deciding the asset allocation and will deliver as per its objectives. The fund has delivered 27% over the last one year.

Going forward, the fund is expected to deliver well as the mechanism of deciding the asset allocation is good and the fund it invests in enjoys a good track record in the long run. The risk profile for both the funds is low compared with most of their peers.

Investors investing in those funds can consider a long-term exposure to these funds if and only if they intend to buy into something that respects the asset allocation mantra rather than just returns.