What is Asset Allocation Fund? EXPLAINED

Asset Allocation Fund is a type of mutual fund that invest in multiple asset classes such as equities, bonds, gold, real estate, etc. These funds try to diversify your portfolio by considering various asset classes in order to get better returns from investments. When any of the asset class is expected to provide better returns, the allocation in that asset class will be increased and vice versa. Balanced funds are the most common type of asset allocation fund with at least 65% of investments in equities to get better returns as equities gives us high rewards in long term.

Let us understand more about Asset Allocation Fund in detail.

Table of Contents

What is Asset Allocation Fund?
How Asset Allocation Fund Works?
Types of Asset Allocation Funds
Benefits of Asset Allocation Fund
Limitations
Taxation for Asset Allocation Funds
Conclusion

What is Asset Allocation Fund?

Asset Allocation Fund is a type of mutual fund that invest in multiple asset classes such as equities, bonds, debt instruments, gold, real estate properties, etc.
These funds mainly focus on providing a balance between equities and debt instruments so that you get better returns with managed risks
Balanced funds are the common type of Asset Allocation Fund with at least 65% allocation in equities. It provides good returns compared to other Debt mutual funds
If any of the asset is expected to provide better returns in upcoming quarters, the allocation to that asset will be increased and vice versa
Asset Allocation fund are best suited for risk averse investors who want to take low risk with decent returns

How Asset Allocation Fund Works?

The working of Asset Allocation Fund is quite simple:

Every Asset Allocation Fund is assigned a fund manager that is responsible to select the asset class to invest in
The fund manager select the assets based on expected returns and the underlying rules of the fund for which it is known for
If the fund is aggressive to get better returns, than more allocation is done in equities
Otherwise if the fund is expected to keep the capital of investors safe, more allocation is done in the debt instruments
Based on the demand of the asset allocation and their expected returns in future, the allocation to various assets will be updated by fund manager, in order to get returns and balance risk with the capital of investors
Hybrid Mutual Funds can be a subset of Asset Allocation Fund since hybrid funds also invest in a mix of equity and debt instruments

Types of Asset Allocation Funds

There are mainly 2 types of Asset Allocation Funds:

Dynamic Asset Allocation Fund:
These funds are dynamic in nature which means the allocation to assets will be updated based on the upcoming returns expectation. So let’s say in upcoming months the returns from gold is expected to be better than debt instruments, so the allocation to gold will be increased and debt instruments will be decreased.
Static Asset Allocation Fund:
These funds allocate assets based on pre defined allocation percentage and stick to it irrespective of market conditions, based on the rules using which the mutual fund was created. The asset allocation is not changed much in this case, for example, balanced funds having at least 65% of allocation in equities.

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Benefits of Asset Allocation Fund

Below are some of the Benefits in Asset Allocation Funds:

Diversification:
Asset Allocation Funds invest in multiple asset classes based on the nature and type of mutual fund, and hence you get the benefit of diversification – not putting all your eggs in one basket. Is it important to diversify your investments to avoid losing your had earned money in case any one of the asset does not provide good returns
Better Returns:
The returns from Asset Allocation Funds are better compared to other Debt mutual funds since some assets are allocated to equity as well, which provide good returns over long term
Control over Volatility:
The volatility in Asset Allocation Funds is controlled due to diversification of your investments in equity and debt instruments

ALSO READ: Rs. 1000 Mutual Fund Returns Calculation

Limitations

Below are some limitations of Asset Allocation Funds:

Over Diversification:
If you are already investing in couple of mutual funds, you might over diversify your portfolio by investing again in Asset Allocation Funds which should be avoided
Tax Structure:
During redemption, you need to pay tax on profits made in Asset Allocation Funds based on short term or long term capital gains
Low Returns than Equity Funds:
The returns provided by Asset Allocation Funds are lower than most of the Equity mutual funds which purely invest in equities to get better returns. Over long term of 5 to 7 years, equity mutual funds give better returns

ALSO READ: All Types of Mutual Funds in India

Taxation for Asset Allocation Funds

As far as Tax on Asset Allocation Funds are concerned

If equity portion is less than 35% in the mutual fund, the profits (Short term and Long term) made will be added to your income and taxed as per income tax slab rates
If equity portion is between 35% to 65%, the STCG will be taxed after adding profits in your income and LTCG will be taxed at 20% rate with indexation benefit
And if equity portion is more than 65%, STCG will be taxed at 15% rate and LTCG will be taxed at 10% for profits above Rs. 1 Lakh in Financial year

Conclusion

So Asset Allocation Funds helps you to diversify your investment portfolio while investing in multiple asset classes. It provide you the benefit of diversification and investing in debt, gold, real estate, etc. apart from investing in equities.

Asset Allocation Funds are best suited for risk averse investors, who want to take low risk and get better returns on their investments.

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