Asset Allocation & Taxation

Mutual funds have wide variety of schemes that suit almost all types of individuals under various risk categories. So, if you are a conservative risk taker, then short term debt mutual funds or large-cap equity mutual funds would be more suitable for you. On the other hand, if you are an aggressive investor, then you can also look at investing in thematic or sectorial mutual funds based on your requirements and time horizon.

- IE&M Research

 

Asset Allocation

Asset allocation means allocating assets to a particular financial goal in such a way that it satisfies the time horizon for which it is invested and changes as per the change in the time horizon. For example, say, you wish to save money for your child's education, which is 8 years away from now, and based on your risk profile, you need to allocate 80 per cent to equity and 20 per cent to debt. So, as you move further where your child's education is 3 years away, you need to switch 80 per cent that is in equity to debt.

Remember, while doing so, you need to periodically rebalance the mutual fund portfolio and bring it back to the original asset allocation.

An Example: First, you need to assess your risk profile. Say, your risk profile is assessed to be aggressive. Then you need to define a financial goal or objective with a specific time horizon. Based on that, you need to identify the amount that you would require at the end of the defined time horizon. So, in our case, we will assume your financial goal is your child's education, the time horizon is 8 years from today and the amount required at the end of 8 years is Rs 15 lakh (inflationadjusted).

Now, based on the risk profile and the financial goal, we arrived at asset allocation, which suggests investing 80 per cent in equity and 20 per cent in debt. Based on the above information, to achieve this financial goal, you need to do SIP of Rs 5,000 or lump sum investment of Rs 8 lakh (SIP and lump sum figures are hypothetical). Therefore, the thing is pretty much clear that you need to invest Rs 4,000 in equity MFs and Rs 1,000 in debt MF via the SIP route and Rs 6.4 lakh in equity MFs and Rs 1.6 lakh in debt MFs via the lump sum route.