Thursday, July 8, 2010


Studies have shown that Asset Allocation is the key to investment success. 94% of investment success is explained by asset allocation where as the product selection and timing contributes 4% and 2% respectively. And yet most of us spend the majority of our time trying to time the market – a totally futile exercise.

Asset Allocation normally refers to investments in Equity and Debt in a certain proportion. Equity means investments in shares of companies and brings growth to the portfolio. Debt refers to lending and brings regular income to the portfolio. The allocation between equity and debt would depend on the risk you are willing to take and the term of investment. Having an asset allocation would give the following benefits:

1. When the equity market moves up, you would reduce your holding to equity and hence book profits when the market is high – sell high
2. When the equity market moves down, you would add to your holding in equity and hence – buy low.
3. Sticking with the asset allocation would remove the disadvantages of the emotion of “greed” and “fear” in investing.

The easiest way to manage your asset allocation is to invest in balanced mutual funds. A balanced mutual fund invests 65-70% in equity and 30-35% in debt. There are many advantages of holding balanced funds as a means to maintaining an asset allocation:

1. The fund is rebalanced every month, it would be difficult to maintain that kind of discipline
2. When the market crashed the way it did in 2008, you did not have to add your own funds to equity to rebalance your portfolio. The fund automatically rebalanced.
3. When you book profits to rebalance your portfolio, there would be capital gains implication – especially with the new Direct Tax Code. When the fund rebalances there is no capital gain implication. You would have to pay capital gains only when you sell your balanced fund.

The Sensex has been very flat over the last 6 months, and going forward, unless the situation in Europe improves, this year is likely to be a flat year. Balanced category has outperformed the Sensex in all periods. The more volatile the market, the more likely that the balanced fund would out perform the Sensex.
If you wish to know which balanced funds to invest in contact me at or at