If you are from an area that has good monsoons, you would know how annoying it is if you are outside and it suddenly starts raining and you are caught off guard without an umbrella. At times like these, you would give anything for an umbrella or similar protective gear. But does that mean you’ll be carrying around an umbrella all year round? Probably not, as it might be of little use to you during the winter months. At that point, you’ll be looking for another type of gear like a lightweight jacket.
Building a strong, long-term investment portfolio is of the same nature. Due to the changing nature of the economic landscape and the investment environment, some investments in your portfolio may perform well at times, while other investments may not. Now, if you were heavily biased towards a particular investment and caught on a downside, it would have an inordinately large impact on your portfolio. To avoid this, it is important to follow a personalized asset allocation strategy that is well aligned with your return requirements, your risk profile and your investment time horizon.
So what exactly is asset allocation?
Asset allocation involves investing your portfolio investments in multiple asset classes like stocks, debt, gold, etc., so that sharp falls in one asset class do not have not have a disproportionately large impact on the overall performance of your portfolio. For example, if you are heavily stock-oriented, you will surely rejoice during stock market rallies. However, when the markets go down, your investment portfolio would be badly affected.
On the other hand, if you also had the right amount of debt in your portfolio, falling stock markets wouldn’t bother you as much. Such is the power of asset allocation. Don’t be fooled into thinking that asset allocation is simply investing in a random set of asset classes. The trick here is to get the allocation proportion right. To do this, you need to consider your return requirements, your risk profile, your investment time horizon, and then create an investment strategy that clearly outlines exposure to multiple asset classes.
Have your cake and keep it too
In reality, gaining this exposure through multiple investments can be a difficult task. Overall, for an individual investor, it can become difficult to identify the right level of exposure to multiple asset classes and then maintain that exposure or rebalance in response to changing environment and market conditions. personal circumstances. As a result, many investors choose to invest in funds of funds (FoFs) instead.
Like regular mutual funds, these funds also pool investors’ money and then invest more of it. However, unlike other mutual funds that invest in different asset classes, FoFs invest in other funds, giving you, as an investor, access to multiple investment options, via a single investment. Additionally, these mutual funds can invest in both domestic and international funds, depending on the investment mandate of that particular scheme. This means that the FoF option can potentially provide increased diversification benefits. There are several types of FoFs, depending on the different types of funds in which the FoF invests.
Within this broad category of FoFs, asset allocation FoFs offer an excellent opportunity to achieve optimal diversification through asset allocation. These FoFs invest in a diversified pool of mutual funds in equities (domestic and/or international), debt and gold. As a result, they can reap the investment benefits of multiple asset classes and achieve optimal asset allocation. Through this arrangement, while the exposure to equities provides the potential for return, the presence of gold provides a hedge against inflation, and debt helps provide downside protection.
To conclude, asset allocation FoFs are an ideal solution for a non-professional investor, as they give you the required exposure to different asset classes through a single investment professionally managed by investment experts. This is because you don’t have to worry about fund selection or rebalancing. All you have to do is start investing and stay invested for the long term.