Asset allocation
How money is divided between shares, bonds, gold and cash, and why the split shapes the range of outcomes
Market figures as on 31 August 2026; SEBI scheme categories as on 20 March 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room: two people each hold five mutual fund schemes. One holds five equity schemes. The other holds two equity, two debt and one gold scheme. Who is more diversified? Use the answers to open slide 2.
Asset allocation is the decision of how much to hold in each kind of asset. It comes before choosing a scheme.
Different assets react to different things. Holding more than one kind changes the range of results a portfolio can have. It does not remove risk, and it does not assure a return.
Trainer notes
An asset class is a group of investments that behave in a broadly similar way: shares, bonds, gold and so on. This deck explains the idea. It does not say what anyone's split should be.
The main asset classes
| Asset class | What the investor holds | What it is mainly exposed to |
|---|---|---|
| Equity | A share in the business of companies | Company profits, and the price the market puts on them. Prices can swing widely. |
| Debt | A loan to a government or a company, in return for interest | Interest rates (bond prices fall when rates rise) and the borrower's ability to repay. |
| Gold and silver | A commodity, held directly or through a fund | World prices and the rupee's exchange rate. It pays no interest or dividend. |
| Real estate | Property, or units of a REIT or InvIT | Rents, property prices and interest rates. Property itself can be slow to sell. |
| Cash | Bank balances and very short-term deposits | Inflation. The value may not keep pace with rising prices. |
A general description for training. A REIT is a real estate investment trust; an InvIT is an infrastructure investment trust.
Trainer notes
Keep this at the level of 'what moves it'. For mutual funds, SEBI has treated REIT units as equity-related since 1 January 2026, while InvIT units remain hybrid instruments. Overnight and liquid funds are debt schemes, though people often use them like cash.
How a mix changes the range of outcomes
ASSUMED OUTCOMES
₹1,00,000 is held for one year.
Asset A ends the year between 20% down and 30% up.
Asset B ends the year between 4% up and 8% up.
- All in A: the year ends between ₹80,000 and ₹1,30,000. The range is ₹50,000 wide.
- Half in each, weak year for both: ₹50,000 × 0.80 + ₹50,000 × 1.04 = ₹40,000 + ₹52,000 = ₹92,000.
- Half in each, strong year for both: ₹50,000 × 1.30 + ₹50,000 × 1.08 = ₹65,000 + ₹54,000 = ₹1,19,000.
- The mix ends between ₹92,000 and ₹1,19,000. The range is ₹27,000 wide: a smaller fall and a smaller rise.
Result: The mix narrowed the range at both ends. It gave up part of the rise to limit the fall.
Invented figures to show the arithmetic only. They are not estimates of what any asset will do.
Trainer notes
Real assets do not have fixed best and worst cases, and both can fall in the same year. The benefit of mixing is larger when the assets do not move together, and it tends to shrink in a crisis, when many assets fall at once.
Strategic and tactical allocation
Strategic
- A long-term target mix, such as 60% equity and 40% debt
- Set from the person's goals, time horizon and ability to take risk
- Changed when the person's circumstances change
- Kept in place by rebalancing
Tactical
- A temporary tilt away from the target mix
- Made on a view of where markets or interest rates are heading
- Helps only if the view proves right, and in time
- More shifts can mean more cost and more tax
Take-away: A tactical shift is a forecast put into action. Forecasts can be wrong.
Trainer notes
The 60/40 here is only an example of what a target looks like, not a suggested mix. A distributor does not make tactical calls for a client. Some hybrid schemes make them inside the fund, under the scheme's stated policy; see slide 8.
Rebalancing: back to the target mix
THE SET-UP
The target mix is 60% equity and 40% debt.
₹10,00,000 is invested: ₹6,00,000 in equity and ₹4,00,000 in debt.
Assume that in a year equity rises 25% and debt rises 5%.
- Equity: ₹6,00,000 × 1.25 = ₹7,50,000. Debt: ₹4,00,000 × 1.05 = ₹4,20,000. Total ₹11,70,000.
- Equity is now ₹7,50,000 ÷ ₹11,70,000 = 64.1% of the portfolio, not 60%.
- The target on ₹11,70,000 is ₹7,02,000 in equity (60%) and ₹4,68,000 in debt (40%).
- To rebalance, ₹7,50,000 − ₹7,02,000 = ₹48,000 moves from equity to debt.
Result: Rebalancing brings the level of risk back to what was chosen. It is not a way of earning more.
Illustration with assumed figures. The returns are invented and are not a forecast.
Trainer notes
Check: ₹4,20,000 + ₹48,000 = ₹4,68,000. Moving money between schemes is a redemption from one and a purchase in the other, so capital gains tax and any exit load can apply. Directing new money to the lagging asset is another way to move towards the target.
Risk capacity and risk willingness
Risk capacity
How much loss the person's finances can absorb. It depends on facts: how steady the income is, when the money is needed, who depends on them, and what they owe and own.
Risk willingness
How much rise and fall the person can live with. It is a matter of temperament, and it shows most clearly in what they did the last time their investments fell.
Take-away: The two can differ. A questionnaire captures only part of either, so the conversation matters.
Trainer notes
Example to tell: a young salaried person with no dependants may have high capacity and still lose sleep over a 10% fall. A retired person may be comfortable with swings but have little capacity for loss. Neither fact alone settles the mix.
Schemes that allocate inside the fund
SEBI's categories set how far each type of scheme may move between asset classes.
| SEBI category | What the rule says |
|---|---|
| Multi Asset Allocation Fund | At least three asset classes, with at least 10% in each. Foreign securities do not count as a separate asset class. |
| Balanced Advantage / Dynamic Asset Allocation Fund | Equity and debt only, with the split managed dynamically. SEBI sets no fixed range. |
| Aggressive, Balanced and Conservative Hybrid Funds | Fixed equity ranges: 65% to 80%, 40% to 60%, and 10% to 25%. The rest is in debt. |
| Life Cycle Fund | A target-date fund on a glide path. A 30-year fund holds 65% to 95% in equity at the start and 5% to 20% in its last year. |
Source: SEBI Master Circular for Mutual Funds, 20 March 2026, paras 3.8.3 and 3.8.4 and Annexure 1B (categorisation circular of 26 February 2026).
Trainer notes
There are seven hybrid categories; the other two are Arbitrage and Equity Savings. A glide path is a preset schedule that lowers the equity share as the maturity date nears. Hybrid schemes may put a residual part in gold and silver ETFs, commodity derivatives and InvITs within SEBI's ceilings. Describe the categories; do not rank them.
One marker for each of three assets
Equity is quoted as an index level, debt as a yield, cash as a rate. These are levels on a date, not signals.
- EQUITY: NIFTY 50
- 24,080Closing level of the index of 50 large companies on 31 August 2026: 24,080.40.
- DEBT: 10-YEAR G-SEC YIELD
- 6.95%Yield on the 6.94% Government security maturing in 2036, on 31 August 2026: 6.9497%.
- POLICY RATE: REPO
- 5.50%RBI's policy rate, raised from 5.25% on 7 October 2026 (5.25% on 31 August).
Sources: NSE Indices daily index close file, 31 Aug 2026; FBIL G-Sec prices/yields, 31 Aug 2026; RBI Monetary Policy Statement, 7 Oct 2026.
Trainer notes
Refresh these at each month-end, using market figures that are at least 30 days old. The point of the slide is that each asset class has its own yardstick, so they cannot be compared on one number. Do not say that any of them is high, low, cheap or expensive. Market figures are shown with a lag of at least 30 days, in line with SEBI's norms on price data used for education.
If you learnt this from older material
What older material says
- SEBI's 2017 list of 36 scheme categories
- 'Solution oriented' schemes for retirement and children
- Debt funds held three years get indexation, so shifting to debt is tax-light
What holds now
- Categories were redone by SEBI's circular of 26 February 2026
- Dropped as a category (funds may continue); Life Cycle Funds are new
- Debt fund units bought from 1 April 2023: gains taxed at slab rate
Sources: SEBI Master Circular for Mutual Funds, 20 March 2026, Part IV of Chapter 3; Trustner Academy verified fact sheet (investments), 7 Oct 2026; HSBC Mutual Fund Tax Reckoner 2026-27.
Trainer notes
Existing schemes had until 26 August 2026 to comply with the new categories. Indexation was withdrawn for mutual fund units from 23 July 2024. The tax point matters here because rebalancing between schemes is a sale; see the capital gains deck.
Four things people get wrong
Misconception'Diversified means it cannot fall.'
What is trueA mix can still lose value. It changes the range of outcomes; it does not remove loss.
Misconception'More schemes, more diversification.'
What is trueFive equity schemes are still one asset class, and they can hold many of the same shares.
Misconception'100 minus your age is the rule.'
What is trueIt is a rule of thumb, not a regulation. It ignores income, goals and obligations.
Misconception'Rebalancing costs nothing.'
What is trueA move between schemes is a redemption. Tax and exit load can apply.
Take-away: A mutual fund distributor explains these ideas. We do not prescribe an asset allocation.
Trainer notes
On the second point: SEBI now requires fund houses to disclose portfolio overlap between their schemes. This slide also answers the opening question: the number of schemes says little; the spread across asset classes says more. The green band is the line to hold in every client conversation.
Check yourself
Question 1: A 50:50 portfolio holds ₹5,00,000 in equity and ₹5,00,000 in debt. Assume equity falls 20% and debt rises 4%. What is the equity share now, and what move restores 50:50?
Answer: Equity ₹4,00,000, debt ₹5,20,000, total ₹9,20,000. Equity share = 4,00,000 ÷ 9,20,000 = 43.5%. Target is ₹4,60,000 each, so ₹60,000 moves from debt to equity.Question 2: What does SEBI's rule require of a Multi Asset Allocation Fund, and how does a Balanced Advantage Fund differ?
Answer: Multi Asset: at least three asset classes with at least 10% in each. Balanced Advantage / Dynamic Asset Allocation: equity and debt only, managed dynamically, with no fixed range.Question 3: A client asks: 'Just tell me what percentage I should keep in equity.' What can a mutual fund distributor do, and not do?
Answer: Explain asset classes, risk capacity and willingness, rebalancing and how scheme categories differ. Not name a percentage or recommend a mix; a client who wants a personal allocation can approach a SEBI-registered investment adviser.
Sources and disclaimer
Sources for the figures in this explainer
- Hybrid categories, their equity ranges, the multi asset rule and Life Cycle Funds: SEBI Master Circular for Mutual Funds, 20 March 2026, paras 3.7 to 3.8.4 and Annexure 1B.
- Nifty 50 close 24,080.40 on 31 Aug 2026: NSE Indices daily file. 10-year G-sec yield 6.9497% on 31 Aug 2026: FBIL G-Sec yields. Repo rate 5.50%: RBI Monetary Policy Statement, 7 Oct 2026.
- Debt fund tax and the 2017 category count: Trustner Academy verified fact sheet, 7 Oct 2026. REIT and InvIT classification (para 13.13) and the 26 August 2026 date (para 3.8.9): SEBI Master Circular.
- Assets A and B, the 60:40 and 50:50 mixes and all returns in the examples are invented. They are not forecasts and not suggested allocations.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).