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Mutual funds – Its all about asset allocation

Aug 24, 2001

Asset allocation is a very important concept in financial planning. And mutual funds are a great way to achieve it. Unfortunately few investors plan with purpose. For most investors its just about returns and dividends. There is more to mutual funds than just beating the benchmark index, posting 25% compounded annual growth or declaring 15% dividend. These accomplishments are noteworthy but that is not what mutual funds are all about. Mutual funds don’t just make great investment products, they can also serve as asset allocation programmes to fulfill a critical need like child’s higher education, marriage, buying a house or a car, planning for retirement. In developed markets like the U.S. this has been happening for many years now. Unfortunately in India, this is a concept that is yet to take off and mutual funds really haven’t got their due in that sense.

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In an interview with, Mr Sanjay Sahdev, (CEO & MD of IDBI-PRINCIPAL Mutual Fund) had this to say about asset allocation in mutual funds, ‘We (IDBI-PRINCIPAL Mutual Fund) call it a life stage allocation. We developed that concept after spending a lot of time on formal research and what we found was that although the mutual fund industry had some decent products there was no connection between what those products had to offer and the needs of the investors. So what was needed was some kind of asset allocation model in place. Saving for a house is very different than saving for retirement. There are questions investors need to ask themselves - when should you start saving for retirement or when should you start saving for buying a new house, how long will it take, how much money should you set side aside. No one really thought of these things. The average investor in this country unfortunately doesn’t have that support system in place and he has to rely on somebody else for advice and that is where things go wrong.’

As the Indian investor gets more sophisticated, asset allocation is going to prove increasingly critical. And this will make mutual funds an investment avenue with an answer to most if not all financial needs. Mr Sachdev prophesied, ‘‘The asset allocation programme is undoubtedly the future of the industry. The working of asset allocation is very easy, people are doing it in the country already as personal advisors, financial advisors, etc. The basic concept is that no one should put all his eggs in one basket. Every investor must have a well-diversified portfolio so that he can get value and enhancement of his wealth.’

And like all other aspects of life, an early start can prove very handy even in asset allocation programmes. Mr Sachdev elaborated on this, ‘The faster you start planning the better it is. Suppose one starts saving at the age of 25 years and another starts at the age of 35 years or even 30 years. By retirement, the one who started earlier at 25 years may have saved as much as 7 times the person who started later.’

The asset allocation model is just beginning to find its feet in the country in the form of Children Plans. The Unit Trust of India (UTI) of course already had some programmes for children, but now we are increasingly witnessing more private players take to such schemes. These plans look at providing for the child’s college, higher education, marriage. But there is a need to educate the investor first so that he realises the importance of asset allocation and invests for a purpose and not just to clock 15% compounded growth.

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