How lazy investors can make money

To get decent participation from equity, one should stay invested in capital protection schemes or hybrid schemes for at least three years. 

Fund houses offer certain all-encompassing schemes which, for practical reasons, should have little place in your portfolio.

Ramanathan K, executive director and chief investment officer at ING Investments Management, defends asset allocation funds with: “Not everyone has the acumen or expertise on how to invest in multi-asset funds. Such schemes play a big role because they give exposure to liquid, gilt, gold and equity (schemes) at the same time.”

Not everyone is convinced. “Unless there is a pre-determined asset allocation and re-balancing based on this, it makes little sense to go for these. I would rather invest in independent dedicated schemes separately - in equities for growth, debt for safety, liquid for liquidity and gold exchange-traded funds for portfolio diversification. That would make my portfolio stable and well diversified, instead of having one scheme where I have to invest a bulk amount,” says certified financial planner Gaurav Mashruwala.

There are several other such all-encompassing schemes , such as life cycle funds, capital-protection schemes, asset allocation and many others that want to capture too many things and often make little sense in your portfolio. 

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Then, there are capital protection schemes, targeted at the risk-averse investor who yet wants some exposure in equity.

“Capital protection funds make sense for (such) investors,” says G Pradeepkumar, chief executive officer at Union KBC Asset Management.

The duration of these schemes can range from two to five years. But isn’t the risk-averse investor better off by investing in pure debt?

As a financial planner says: “If I want to protect my capital with small returns, I can go for a debt fund or corporate deposits. Why should I invest in something that is 80 per cent debt and 20 per cent equity?” 

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Limited utility

Some of these funds have their own utility but these are limited. As Karthik Jhaveri, director, Transcend Consulting, says: “If you have a very small amount to invest, such as Rs 2,000 or Rs 5,000, instead of distributing it among many schemes, one can invest in one.

Or, if you are a first-time investor who wants to put some money in mutual funds, you could opt for these.” Typically, such schemes are meant for investors, unwilling to spend time on asset allocation and investing in a disciplined manner.

Others might give some tax advantage. The only reason Mashruwala would ask anyone to buy an asset allocation fund is because if one wants to do a reallocation or rework the portfolio, there could be an exit load and capital gains tax. 

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For instance, you have 40 per cent in equity funds, 30 per cent in medium and long-term debt, 20 per cent in liquid schemes and 10 per cent in gold.

Now, if there is an imbalance in the portfolio due to a price rise in gold (its value becomes 20 per cent in the portfolio and equities fall to 15 per cent), then this needs to be rejigged by putting more money in gold from equity.

In this situation, there will be an exit load and capital gains tax, depending on the tenure that the schemes have been held.

On the other hand, if one buys an asset allocation fund, if the allocation is pre-determined at the mentioned levels, the rebalancing will happen without any financial burden on you.

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Complications

While there is a benefit in asset allocation funds, most financial planners will say it is better to invest separately in independent schemes. “Independent schemes allow for more manoeuvrability. All these multi-cap, flexi schemes make little sense,” says Jhaveri.  

For instance, ICICI Prudential's Volatility Fund doesn't give you a clear picture of the objective. While the scheme is meant to create long-term wealth, it aims for capital appreciation by using equity derivatives and arbitrage opportunities.

Hemant Rustagi, chief executive, WiseInvest Advisors, suggests one invest in schemes  whose objective is clear and asset allocation is familiar. Some exotic-sounding schemes might have a narrow definition but can be safer than pure thematic funds if they invest in various sectors. However, they will remain riskier than large diversified funds.

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Already in? Give it time

To get decent participation from equity, one should stay invested in capital protection schemes or hybrid schemes for at least three years.

This is because in a short duration, in a volatile equity market, things might not work for you at all. Also, if you want to exit in the interim in some of these closed-end funds, there will be few buyers.

Even if listed on the stock exchange, Pradeepkumar cautions, one cannot easily exit this sort of scheme, unless one gets a buyer in the secondary market.

Ideally, investors should keep it simple. Have a few equity diversified schemes (not more than four or five), debt funds and, for diversification, look at gold or pure sector funds.