Many investors chase high returns and therefore are always on a lookout for best performing mutual funds. They excitedly invest in the funds that have given maximum returns in last 1/3/5 years. Within months, they are tempted to change these existing funds if they find some other fund more attractive. This frequent switching of funds seldom creates wealth over long term as frequent switching means more exit load, higher taxation and unstable, randomly created portfolio.
Rather than focussing only on best performing funds and trying to maximise returns, seasoned investors and experienced advisors understand the virtue of Asset Allocation to generate consistent, long term superior risk adjusted returns.
Asset Allocation means investing some part of money in different category of investments i.e. debt, balanced, large cap and midcap funds.
Why Asset Allocation?
Nothing is more important than appropriate asset allocation of investments for generating long term, consistent returns in Mutual Funds. Over different market cycles, different kinds of Mutual Funds perform the best. The 8-9% returns of debt funds may look better when the stock markets are down and equity funds are in negative. In another scenario of small caps and midcaps giving exceptional returns, just like they have in last 2-3 years, large cap funds and balanced funds may seem unattractive.
Investors run the risk of allocating major portion of their investments in the theme that has already played out partially or fully, leading to higher expectations but lower or negative Mutual Funds returns. Therefore, asset allocation should form an important part of investment process. Asset allocation among various kind of funds like debt, balanced, midcap and large cap may be planned as per one’s financial goals. The financial goal may be a specific Family Goal, Age based goal, Target Return goal or Asset Allocation goal.
The allocation of money to various kinds of funds assures the investor that he is always allocated to themes that are working well in the market. Being always present in the performing theme is more important than not being in the theme at all.