Iwas recently watching a television show wherein an investment expert was taking questions from callers who dialed into the show. The expert was making a rather strong case for asset allocation and exhorting callers to invest in diverse assets classes. His constant rhetoric was, Diversify your portfolio by investing in various asset classes such as equity, fixed income, gold and mutual funds. That line got me thinking. Here was an investment expert who believed that mutual funds are an asset class by themselves, much like equity or gold.

In reality, mutual funds are investment avenues that can help you invest in a variety of asset classes, rather than it itself being a distinct asset class. For instance, if you wish to invest in equity, then you can select a largecap, a small cap or a mid-cap fund. Likewise, a bond fund or a government bond fund can help you take exposure to the fixed income asset class. Hence, it is important that mutual funds be seen as a "means to an end" rather than an "end" in itself.

Mutual funds are multifaceted avenues given the choices they offer. To better understand this, let's take the case of an investor in his 20's, and whose investment objective is long-term wealth-creation. His portfolio can be constructed as follows: 40% in large-cap mutual funds forming the core of the portfolio, 25% in small/mid-cap funds, 5% in sector funds to provide an impetus to the portfolio, 15% in short-term bond and gilt funds for fixed income exposure, 5% in money market funds to keep the portfolio liquid and to allocate a portion to gold, 10% in gold funds. This example demonstrates how one can build a robust and diversified portfolio that has exposure to multiple asset classes despite being invested only in mutual funds.

It is noteworthy that some mutual funds are inherently tools for asset allocation. For instance, allocation funds such as balanced funds and monthly income plans simultaneously invest in equity and fixed income instruments in different proportions. Fund companies have smartly tapped into the Indian investor's long-standing fascination for gold by introducing funds that can simultaneously invest in equity, fixed income and gold (via the ETF route). The portfolio manager decides the allocation to be made to each asset class within the broader limits mentioned in the scheme information document. In effect, such funds are a one stop-shop for asset allocation.

Finally, let's not overlook the significance of portfolio managers who are responsible for running funds. Managers are seasoned investment professionals who understand the nitty-gritty of the asset class they operate in, and are better equipped to deliver returns compared to retail investors investing on their own.

Best Performing Mutual Funds

1. Largecap Funds Invest Online
1. DSP BlackRock Top 100 Fund
2. ICICI Prudential Focused Blue Chip Fund
3. Birla Sun Life Front Line Equity Fund
2. Large and Midcap Funds Invest Online

1. ICICI Prudential Dynamic Plan
2. HDFC Top 200 Fund
3. UTI Dividend Yield Fund
2. Mid and SmallCap Funds Invest Online

1. Reliance Equity Opportunities Fund
2. DSP BlackRock Small & Midcap Fund
3. Sundaram Select Midcap
4. IDFC Premier Equity Fund
3. Small and MicroCap Funds Invest Online

1. DSP BlackRock MicroCap Fund
4. Sector Funds Invest Online

1. Reliance Banking Fund
2. Reliance Banking Fund
5. Tax Saver MutualFunds Invest Online
1. ICICI Prudential Tax Plan
2. HDFC Taxsaver
3. DSP BlackRock Tax Saver Fund
4. Reliance Tax Saver (ELSS) Fund
6. Gold Mutual Funds Invest Online

1. Relaince Gold Savings Fund
2. ICICI Prudential Regular Gold Savings Fund
3. HDFC Gold Fund