The concept of asset allocation and periodic rebalancing is extremely relevant, but equally if not more challenging to implement, especially at scale.
In bull markets, investors are reluctant to rebalance from equity to debt for fears of missing out on further gains as well as for taxation considerations.
MFDs are also reluctant to redeem equity for rebalancing due to uncertainty on whether the money will indeed come back for re-allocation to debt.
Many investors have FDs and EPF as debt allocations and approach MFDs only for equity allocations. No point in trying to do asset allocation within their MF portfolios.
For small investors, the money that they put into mutual funds is their only hope to generate some wealth for themselves. The luxury of asset allocation comes only later – once you have built a certain corpus.
MFDs typically implement asset allocation and rebalancing for their A category clients – the top 20% who account for 80% of AuM. This is the segment where clients perhaps expect some form of value addition / advisor alpha through portfolio actions, and not just behavioural guidance.
Most MFDs have a long tail of under-serviced clients – their B and C category clients. These clients are best served through model based asset allocation funds (BAFs and MAAFs), which give them smoother journeys with lower level of MFD engagement.
Some of the most successful equity hybrids in the market have delivered close to equity fund returns with much lower volatility over the long term. MFDs should showcase risk adjusted returns to make the case for such hybrids in every retail investor’s portfolio.
With the Budget now giving parity LTCG tax treatment to fund of funds products, an interesting range of options are now looking attractive in the asset allocation space for investors.
Corrections like the present one are useful times to reiterate to clients the merits of asset allocation and periodic rebalancing. This is the right time to reach out to all your under-serviced clients and help them migrate to asset allocation funds as per individual circumstances and profiles.
For SIPs, maintaining the discipline is important and hence active management of accumulated corpus is best avoided – even as you maintain focus on asset allocation for the rest of their portfolio.
Always focus on goal based SIPs – that takes away market related decisions out of the picture.
However, in goal based SIPs, itis critical for MFDs to become active 24 months before the goal’s target date. Market movements become very relevant from then on to ensure that the SIP delivers the planned outcome.