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Just as their name implies, asset allocation funds move their portfolios between equity, debt, and gold, based on market conditions. The strategy sounds perfectly reasonable after all, as it takes care of the problem of shifting allocations yourself.
There are 10 asset allocation funds. And with a one-year average return of 10.6 per cent, these funds have been eclipsed by both debt-oriented and equity-oriented balanced funds, which have returned around 20 and 16 per cent, respectively. Here’s why.
Equity and debt have both had a relatively healthy run in the past one year; the BSE500 index is up 12 per cent, for instance, while the Nifty is up around 11 per cent. Gilt yields have dropped from around 8.7 per cent in June last year to 7.7 now.
Bogged down by goldBut gold has gyrated over the past year, sliding from mid-2014 until November and climbing higher for a few months before slipping back again.
For the year, therefore, Indian gold prices have slipped 6 per cent. With most asset allocation funds holding around 12-30 per cent of their portfolio in gold, the lower returns here dampened the better performance afforded by equity and debt.
Axis Triple Advatange fund, for example, had gold exposure at around 30 per cent of its portfolio. This put paid to the otherwise timely calls in private sector bank stocks, consumer driven stocks. Funds from the Quantum and Union KBC stables maintained a relatively lower gold exposure at around 12 per cent through the past year. The best of the group, IDFC Asset Allocation FOF Aggressive, posted a 16 per cent one-year return, by cutting gold exposure to nil by May.
Fund-of-funds structureThe second factor is that, some funds are built on a fund-of-funds structure. IDFC and HSBC both have three asset allocation funds with varying exposures to equity, debt and gold.
But because they invest in their own funds, the relative underperformance of IDFC Premier Equity, IDFC Sterling Equity, IDFC SSIF, HSBC Equity and HSBC Income weighed. The case was similar with Quantum Asset Allocation as well. Also, it put a third of its portfolio in liquid funds, which deliver lower returns .
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