Different Types of Asset Allocation Strategies in Mutual Funds

Every mutual fund (MF) investor wants to diversify their investment portfolio across different asset categories or classes. These may be stocks, bonds, cash, gold, real estate, and others.

But, how do you decide which asset mix should your MF portfolio hold? By understanding the different types of asset allocation strategies.

The final allocation strategy or a mix of strategies you want to go with will depend on your risk appetite and investment horizon. However, before getting there, you must understand all possible options at your disposal.

Beginner’s guide to different types of asset allocations in mutual funds

Broadly speaking, there are three types of asset allocations strategies you can consider when building your MF portfolio. These include:

1. Strategic asset allocation

A fairly straightforward strategy, here you pre-fix your exposure to equity and debt-linked instruments when investing in MFs. If you have a long investment horizon with a moderate stomach for risk, you can expose your corpus to 40% equity-linked instruments and 60% debt-linked instruments.

Alternatively, you can reverse the debt and equity distribution if you have a shorter investment horizon where you're looking to earn high returns and can stomach some risk. This strategy is also called the 'buy and hold', as here you stay on a fixed distribution between debt and equity and sell off a certain part of your corpus only to rebalance your portfolio.

Additional Read - Benefit of Asset Allocation in the Portfolio

2. Tactical asset allocation

This is a more flexible asset allocation strategy where you start with a fixed asset allocation ratio but redistribute your corpus in different asset classes depending on how the market performs. Here, investors usually alter their asset ratio in conducive market conditions to capitalize on short-term gains quickly.

For example, suppose your present exposure is 60% debt and 40% equity. But, suddenly, the market starts performing well, and experts predict this spike to last. Bearing this information in mind, you can increase your equity exposure to even 80%, leaving debt to only 20% within your MF portfolio.

The opposite is also possible. When the market is on an unrelenting downward trajectory, you can increase the debt part of your portfolio and significantly decrease the equity part to ensure stable returns. Doing this mitigates your risk and rescues you from sustaining potential losses.

However, when the market is more or less stable, you continue with a pre-decided asset allocation. Long-term investors typically go for a 60% debt and 40% equity ratio, whereas the younger investors do the opposite.

3. Dynamic asset allocation

The most popular strategy, especially with younger investors, is dynamic asset allocation, where you don't have any fixed allocation ratio. You park your money entirely based on the market’s movements. Your allocation here can change with each passing day.

During a downward trend, you can quickly invest your corpus in debt, and during an upward trend, choose equity. There is no resting asset allocation ratio you come back to in this strategy as you do with strategic and tactical asset allocation.

Additional Read – How Do I Invest in Mutual Fund with Moneyfy?

The bottom line

So, which of these three strategies work for you? Whichever tactic you choose, you'll need a reliable way to invest in MFs. For this, you can turn to Tata Capital Moneyfy. Our digital portal lets you compare and instantly invest in some of the best-rated MFs, SIPs, and other investment instruments.

If you want to invest on the go, download our Moneyfy App, and start your investment journey today!