How to do asset allocation when investing in mutual funds?

The benefit of investing in a mutual fund (MF) is that an investor gets a readymade diversified portfolio and that too managed by professional fund managers. So, MF investors needn’t worry to reduce the investment risks through diversification.

To know the suitability of a fund to meet his/her financial goals, an investor, however, needs to do proper financial planning to determine how much to invest and how much risk to be taken.

“Every category and sub-category of mutual fund schemes occupies a distinct place on the risk-return spectrum. You must understand the investment mandate of the scheme well and its risk-return traits. Choose schemes that match your risk profile, investment objective, time horizon and are best suited for the respective financial goal(s),” said Rina Nathani, Chief Business Officer, Quantum AMC.

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To keep pace with the rising prices, one may have little option, but to take some market risks and invest in equities in a methodical way.

“Given that inflation is on the rise, earning efficient inflation-adjusted returns (also known as real returns) is essential. Thus, it would be meaningful to broadly follow the tried and tested 12-20-80 Asset Allocation model, a simple solution for all your investment needs,” said Nathani.

So, even in case of investing through mutual funds, asset allocation may still be done to reduce the market risks further.

“Deploy 12 months of regular expenses (including EMI on loans) in a separate savings account and/or a liquid fund (which shall take care of your emergency needs). Hold around 20 per cent of the entire portfolio in gold (via Gold Funds or Gold ETFs) with a long-term view enabling you to hedge your portfolio and serve as a store of value. And the remaining 80 per cent of the portfolio, invest in various sub-categories of equity mutual funds, which shall help you potentially beat inflation and achieve the envisioned financial goals. This asset allocation strategy could potentially offer your portfolio the correct mix of stability, growth, and protection,” said Nathani.