Divide and earn

Asset allocator funds execute triple ‘right’ strategy to create wealth over long term


Imagine switching on the television to catch the exact moment your favourite batsman hits the century. What if you have a knack for accurately predicting how things shape up? Magical, isn’t it? Like in cricket, successful investing is all about knowing which asset will perform and which will not. The key is allocating more money to the right asset, while lowering the exposure to others.

So, in order to maximise gains, one has to have the right allocation in the right asset at the right time. Investment products like asset allocator funds that successfully execute the triple ‘right’ strategy are able to create sizeable wealth over the long term. Also, they smoothen the investing experience by being less volatile.

Asset allocator fund

The typical reaction of investors when an asset class corrects is that of fear. Similarly, investors become euphoric when asset prices rise sharply. If Warren Buffett’s golden words of ‘be fearful when others are greedy and be greedy when others are fearful’ are practised, then you would realise the typical investor reaction described above is exactly the opposite.

To practise disciplined investing across assets, one needs to have an efficient model that follows time-tested rules. This is exactly what an asset allocator fund does. It is easy to say buy low, sell high for equity allocation, but it is difficult to implement. What is low? What is high? When do you enter and exit? Should you allocate to equity or debt? Will you miss the rally if you redeem? All these questions are easily answered when you have an asset allocation fund in place, which also emerges as an all-weather solution for investors who are willing to stay invested for the long term.

Asset allocator funds predominantly invest in equity and debt. A good asset allocator fund tries to achieve the optimum allocation of debt and equity based on the relative attractiveness of the asset classes. In order to achieve an unbiased view on asset class allocation, several funds tend to use models based on which investment decisions are taken. Such model-based approach ensures that human emotion, which could play spoilsport, is always kept at bay.

Over the last decade, we have seen different events taking centre stage. When Indian markets corrected in 2008, most of the investors sold their equity holdings. By 2015, when markets rallied sharply, very few were ready to sell. And when markets reached peak valuation across market capitalisations in January 2018, investors expected the rally to continue and generate even more returns. This clearly shows that it is very difficult for a lay investor to take prudent decisions. This is where asset allocation funds come in handy. These funds are designed to remain objective in such situations.

When investing in an asset allocation fund, an investor gets the benefit of an actively managed portfolio with the investment corpus diversified across asset classes, constant monitoring and re-balancing, better risk adjusted returns and tax benefits.

Why invest now

Over the past three months, equity markets have moved over 36 per cent, creating one of the sharpest rallies ever. Now, it is time to take a prudent step when investing for the long term. Markets are no longer cheap as they were three months ago. So, it is time to go for a fund which will help an investor stay ahead of the curve. And one fund which helps an investor achieve this is the ICICI Prudential Asset Allocator Fund. Historically, this fund has proven that it has the capability to stay ahead of the curve.

Helping the fund managers decide the optimal asset allocation is an in-house model which has been successfully put to use over the past several years. Between March 2020 and May 2020, an investment of 010 lakh would have become 028 lakh, about 27 per cent more than Nifty 50. This clearly shows that sticking to the right asset allocation and the right fund matters.

Author is founder, Swarn Wealth Management.