Asset allocation is one of the ways of taking advantage of market fluctuations to maximise wealth creation. Through asset allocation, one may invest at a low market and book profit at a high market for higher benefits.
Asset allocation involves investing in different asset classes – e.g. equity and debt – at a certain ratio and evaluating the investment portfolio periodically to check if the ratio is maintained. In case the ratio gets disturbed, assets are to be re allocated to restore the ratio.
An asset allocation ratio may get disturbed most likely by market fluctuations. When the markets go up, the equity part increases and it decreases when the markets go down.
So, rebalancing at a high market would involve shifting of assets from equity to debt to restore the ratio, which results in profit booking at high NAV. On the other hand, rebalancing at a low market would result in higher investment at low NAV, as assets are shifted from debt to equity.
But to maximise return by asset allocation, you need to first determine a ratio as per your risk tollerance capacity and decide how much assets to be allocated in debt and equity. Thereafter, you need to review your portfolio periodically to maintain the ratio.
You may either do the asset allocation activity yourself or invest in a Hybrid Mutual Fund scheme, where this activity is done by the fund manager.
Here are the advantages and disadvantages of doing asset allocation yourself and investing in a hybrid fund:
Investing in a hybrid fund is more convenient, as to allocate assets yourself, you need to have time, knowledge, interest and resources.
You may have to pay capital gain taxes for doing frequent asset reallocation yourself, while the reallocation by a hybrid fund is exempted from the tax.
Choice of assets
You may choose the best assets (funds) by doing the allocation yourself, while the fund manager will only have the control over assets when you invest in a hybrid fund.
By choosing the best debt and equity assets and doing the asset allocation efficiently, you may generate higher return than that of a hybrid fund.
Investing in debt is less costly than equity investments. But hybrid funds – especially aggressive hybrid funds – charge the cost of all equity funds even as they have considerable part of debt in the fund portfolio. So, you may save some costs by doing asset allocation yourself.
While investing in a hybrid fund is more convenient and tax efficient, you may generate higher return in a cost efficient way by doing the asset allocation yourself, provided you have enough time, knowledge, interest and resources for the same. If you can’t do the asset allocation efficiently, it’s better to outsource it by investing in a good hybrid fund than losing the benefits.