Mutual fund unlocked: Asset allocation strategies (Part 1)

It is very important for the investor to decide where and how much money should be invested in various asset classes like equity, debts etc. This process is called asset allocation which is very important part of designing an investment portfolio.

Asset allocation also refers to how much investment is to be parked in different assets like equity, real estate, gold and so on. In the case of mutual funds, asset allocation refers to allocating money between debt and equity mutual funds. There are various strategies for allocating capital to different kinds of mutual funds. Let’s see some of them.

Coffee Can strategy

Coffee Can strategy is a disciplined approach to investing. This investment style refers to investing fixed amounts in different types of mutual funds for a longer term. The investor needs to be very careful while investing by this strategy as choosing the right asset at right time is the key to success in this method. Here investor follows a passive investing strategy where he need not take any knee-jerk reaction on the major happenings in the market. The idea behind this strategy is simple, it suggests that select the mutual funds which are best and just invest and hold them for say 10 years or more.

Fixed percentage strategy

As the name itself suggests, in this strategy, the percentage invested in equity and debt remains constant and does not change with time. That means investors will need to regularly rebalance his portfolio to maintain the asset allocation. That is if the value of investments in equity mutual funds rises, the investor is expected to sell some units and invest them in debt funds and vice versa.