Should you invest in ICICI Prudential Asset Allocator Fund?

Don’t put all your eggs in one basket is an old saying that extols the importance of diversification. Different asset classes perform differently during different time periods. Given this fact, it is necessary for investors to diversify and rebalance their investment portfolio from time to time. In this article I want to discuss the importance of diversification and rebalancing and how to do it.

What is diversification and rebalancing of your portfolio and why is it important?

Since different asset classes such as equities, debt and gold perform differently during different time periods and can see heavy volatility as well as extended periods of consolidation phase, it is important for retail investors to consider adding to their portfolios. It makes sense to do an asset allocation and invest in different asset classes. , Allocation may depend on age, risk appetite and continuity of income. Research has repeatedly shown that asset allocation is a key determinant of strong portfolio performance over the long term.

Apart from proper asset allocation, what is equally important is the periodic review of the portfolio and rebalancing if necessary to restore the desired asset allocation. Also, an ideal asset allocation for an investor is not static in nature. As the profile of investors changes, it changes over the years. Changes in market conditions may also require a review of asset allocation. In the long run, proper asset allocation and rebalancing reduces portfolio volatility thereby helping investors optimize overall portfolio returns.

Why retail investors often fail to diversify effectively and efficiently

While it is easy for an investor to make separate investments in different asset classes, timely review and rebalancing becomes a challenge as he is busy with his business. Moreover, an average investor may not be aware of various factors when it comes to equity market or macro economy. Hence, calling on rebalancing, which asset class to enter or exit becomes a difficult decision. It may also be noted that rebalancing each purchase or sale transaction attracts tax liability on transaction costs and profit received.

How to go about it?

One looking for optimum allocation across asset classes can consider the various hybrid funds offered by the fund house for exposure or exposure. There are different categories within hybrids such as aggressive hybrid funds, conservative hybrid funds, balanced advantage funds and multi-asset allocation funds. These hybrid schemes have to comply with the limits specified by SEBI when it comes to investing in different asset classes.

options worth considering

Among the various asset allocation category of schemes, one of the schemes with a strong track record is ICICI Prudential Asset Allocator Fund of Fund. The fund invests in three asset classes through mutual fund schemes of Equity, Debt and Gold and rebalances periodically based on the in-house equity valuation index. The index is calculated on the basis of four ratios – Price to Earnings, Price to Book, G-Sec * PE and Market Cap to GDP, each with equal weight.

The fund manager relies on the signals of this index to decide when the market is hot and needs to book profits and vice versa. It ensures that no human bias is involved in decision making. Historical data shows that the approach adopted has helped in investing in the right asset class at the right time. Since portfolio rebalancing is done at a fund level, there are no tax implications for the investor.

Since the portfolio is diversified across asset classes, the volatility associated with it is minimized. The standard deviation of the fund is also lower than that of the Nifty 50 index. Since the scheme is allowed to take 100% risk in any asset class, the fund manager is at liberty to take calls for going overboard on any particular asset class at any point of time to optimize the returns of the scheme.

taxation aspect

As ICICI Prudential Asset Allocator has a fund of fund structure and invests in equity and debt schemes, the scheme does not qualify as an equity oriented scheme. Hence, you need to keep your investment in this scheme for 36 months or more so that you can avail indexation and a discounted flat rate of 20% on capital. the gain, Since the benefit of indexation is available at the cost of acquisition, the effective tax rates drop significantly from 20%. If you liquidate your investment before 36 months, the profits will be taxed at your slab rate.

Balwant Jain is a Tax and Investment Specialist and can be contacted at and @jainbalwant on Twitter.

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