The world over, mutual funds are such a successful financial product because of their convenience. Mutual fund investors don’t have to, or ideally shouldn?t, worry about market gyrations, performing and non-performing sectors and companies and other such headaches that plague direct stock investors. All a fund investor has to do is invest in a good fund and let the fund manager be concerned about generating returns.
However, there are a few things that even fund investors need to take care of, a few thumb rules that need to be followed. Profit booking and asset balancing are two of the most important aspects of fund investing that every investor should concentrate on. You can let the fund manager worry about generating returns, but once your fund has earned the returns, it becomes your duty to book those profits by balancing your assets. Every investor should have an ideal asset mix, comprising equities, debt and other asset classes. Once one type of investment starts earning money (which generally is equity), the earnings should be gradually shifted to safer investments (generally debt). This way, not only are the profits protected, but the ideal asset balance is replenished as well.
To make this task easier for fund investors, ICICI Prudential had come out with a unique product a couple of months back, in which equity gains were regularly transferred to a safe and steady debt fund. The idea was an automated profit booking system whereby profits once generated are made permanently safe from the vagaries of the stock markets. Essentially, such a product wasn?t entirely new ? it is offered by a number of AMCs ? but ICICI won by introducing their offering at a very uncertain time, which turned out to be an opportune one for them.
Now, following in ICICI?s footsteps, Bharti-AXA Mutual Fund has come out with a product which is a variation of this theme. In Bharti-AXA?s offering, the money will be first invested in a safe liquid fund and then the gains will be periodically shifted to an equity fund. This variation seems to be more suited to the new hopeful mood of the markets as investors effectively get protection of their initial capital. Since the original investment is in liquid funds, the capital remains safe and only the gains are exposed to equities. Hence, even in the case of a market collapse, the investor won?t lose his initial investment. Furthermore, even in the worst of times, a conservative large-cap equity fund is unlikely to lose more than 50 per cent except temporarily (something that we?ve recently seen). This effectively means that for all practical purposes, such an investment offers true capital protection.
Both of these offerings, despite their different modus operandi, are classic examples of asset balancing. They make even more sense in today?s environment. Last year?s crash was unexpected and so was this year?s minor recovery. Hence, no one really knows where the market is headed. When everyone was earning hugely all through 2007, no one cared about booking profits. But booking profits and rebalancing assets has become the norm today.
However, ICICI?s and Bharti-AXA?s products offer only half of asset balancing as in both of them, the money moves in only one direction.
In one, most of the money will eventually end up in fixed income and in the other, in equities. If, as an investor, this bothers you, then opt for a good balanced fund. Plain old balanced funds offer the best implementation of asset balancing. After all, only balanced funds can actively shift money where the profits are being earned, be it equity of debt.