IDFC Asset Allocation Fund - Moderate Plan: Invest

Equity markets have zoomed again, gold has crashed and interest rates are poised at relatively high levels. So where should you invest? With the IDFC Asset Allocation fund, a Fund-of-Funds, you can invest in all three, in the right proportion.

The fund, available with three plans (Conservative, Moderate and Aggressive) allocates your money across equity, debt and gold funds. It also rebalances this portfolio at regular intervals, so that you automatically cash in on gains, when one asset outperforms others.

Among the three plans, the Moderate plan appears to be the best option today because it has the most desirable allocation between the three assets.

The debt exposure of 0-70 per cent provides a stable return component to the portfolio. The attractive interest rates available on corporate bonds, with the prospect of a rate cut, will bolster returns from this portfolio. The equity portion is capped at 25-30 per cent, providing a ‘kicker’ to the returns. But the unique feature of this scheme, which distinguishes it from the many Monthly Income Plans, is the 5-10 per cent exposure to gold exchange traded funds or commodity funds.

Given that gold/commodities have a proven negative correlation with stocks, they may cushion you against losses if stock prices tumble.

Good record

The fund has fared quite well in its category, managing a 9 per cent annualised return since inception (January 2010), 8.8 per cent over three years and 12.6 per cent in the last one year. Returns are ahead of category averages.

Not many fund houses in India can boast of a good record in both equity and debt products, but IDFC Mutual Fund does.

An analysis of the Moderate plan’s portfolio over the last two years shows that this fund has usually parked 35-40 per cent of its portfolio in IDFC Super Saver Income Fund.

With a 14 per cent return in one year and 9.2 per cent over three years, this fund is a low risk debt fund, which falls in the top quartile within its category. The rest of the debt money is invested across IDFC Money Manager and IDFC Dynamic Bond Fund.

Overall, with an average maturity of 1.4 years and yield to maturity of 8.4 per cent (end-March 2013), the debt portion is designed to deliver reasonable returns from corporate bonds, certificates of deposit and money market instruments, without assuming rate risk.

Mid-cap bias

The equity portion of this fund, which has stayed at 28-29 per cent of the total portfolio, is the part which is aggressively managed.

Much of this money has been allocated to funds such as IDFC Small and Midcap Fund, IDFC Premier and IDFC Sterling Equity, all of which operate in the mid-cap space. Allocations to large-cap Imperial Equity Fund have generally remained at 5-6 per cent of the total portfolio. Mid-cap stocks are generally risky. But today they trade at reasonable valuations after the recent crash and may offer a good buying opportunity for the long term. IDFC also has a seasoned team, with particular strengths in mid-cap stock selection.

The IDFC Asset Allocation fund’s gold exposures are routed mainly through the passive Goldman Sachs Gold Exchange Traded Fund, the largest fund in this category. Despite high gold price returns until last year, the fund has kept its allocations at 5-6 per cent, resisting the temptation to go overweight on gold. This appears a prudent strategy, given that gold acts as a good portfolio diversifier but offers little by way of regular returns.

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