When the markets are volatile, most individuals remain unsure of where to invest. The stock markets have surged recently and are at an all-time high. Industry experts say one should spread one’s investment across asset classes to diversify the risk and reach one’s financial goals.

Investing in one asset class usually leads to losses during adverse market conditions. Hence, during a volatile market scenario, the correct asset allocation is the best approach as each asset class performs differently across various market cycles.

With the help of asset allocation, experts say, one can spread one’s finances across various asset classes to balance the risk of one’s mutual fund portfolio. It varies from investor to investor, depending on factors such as age, income, risk appetite, etc.

How does the asset allocator fund of funds help you?

Asset allocator fund of funds (FoF) follows a passive approach of investing in debt-oriented funds, Gold ETFs, and domestic equity-oriented funds. The scheme invests a minimum of 10 per cent of a portfolio in each asset class of debt, equity, and gold.

For instance, when stock markets are down and increase exposure to gold and debt-oriented funds during volatile markets, the scheme allocates its assets towards equity-oriented funds.

The Asset allocator FoF offers investors exposure to different asset classes by investing in only one scheme. However, industry experts say these funds are suitable for investors who are willing to invest in stocks as equity allocation usually ranges from 40-80 per cent depending on market conditions.

Here are some of the factors to consider before investing in Asset Allocator Fund of Funds;

Investment strategy: Asset allocator FoF are mandated to invest in domestic debt-oriented schemes, equity-oriented schemes, and Gold ETFs of any fund house. Having said so, note that most asset allocator funds are biased towards their schemes despite having a higher expense ratio. Experts suggest investors with higher risk tolerance and an investment horizon of 3+ years should invest in the asset allocator fund of funds as they have substantial holdings in stocks.

Expense ratio: Any fund having a higher expense ratio decreases the investor’s take-home return and vice versa. These funds invest in debt, equity fund schemes and Gold ETFs of the same or different MF houses, which leads to a higher expense ratio, hence, reducing the investor’s take-home return in the long run.

Portfolio composition: Asset allocator fund of funds have a considerable portfolio allocation towards debt securities. Therefore experts suggest one should opt for funds with debt securities of a higher credit rating in one’s portfolio to minimise default risk.

Taxation: Experts say an investor should check in advance if the asset allocator fund of funds is taxed as a debt-oriented scheme or equity-oriented scheme. To get a higher post-tax return, it is suggested to opt for funds that have 65 per cent or higher exposure to equity as they are taxed as equity-oriented funds.