Yet, few of us have a conscious asset allocation strategy. More often than not, we invest in an equity fund because the ad for the fund's initial public offering caught our eye. Or we plough some of our money into various mutual funds, as and when we find our savings bank account balance bloating.

Haphazard investments made in this manner may well leave you with a portfolio which is entirely out of sync with your risk profile. Much better results can be achieved by taking a conscious asset allocation decision.

Start with the total amount you have for investment, decide on the proportion of debt and equity you would be comfortable with and then, decide on the individual funds to man your portfolio.

When choosing a fund, it may be better to only consider funds which have been in operation for at least three years. Resist the temptation to invest in the top-performing fund for the quarter, half-year or even a year.

This is because, most fund managers may generate impressive returns over one market cycle, but few consistently outdo the markets through various market cycles. For instance, few funds which generated three-digit returns during the tech-stock boom of 1999 have done well in the "cyclicals" boom of the subsequent three years.

Also consider the numbers behind the performance. If a bond fund has generated a 25 per cent return in one year, it could have done so by investing in very long-dated securities during a declining interest rate regime or by investing in high-yielding junk bonds. But the downside risk from such a strategy could be quite high.

Spreading your investments across two or three funds, managed by entirely different fund managers, may be a good way to sidestep this risk. But while you need to spread your investments across two or three funds, diversification beyond this may prove counter-productive.

Not only will you be hard pressed to keep track of all of your investments, numbers suggest that holding more than three funds in your portfolio may not give significantly lower levels of risk.

If you have some cash to invest at a time when the equity markets have appreciated sharply, park your money in a bank or in a liquid fund and wait for the markets to cool down before you make your investments.

True, the differences in returns arising from timing may narrow if investments are held for a very long period of time, say 15 years. But there is no reason why an investor should forego returns because of absolutely bad timing.

A couple of other points. Timing your exit from the investment may also be a crucial determinant of returns. And timing may also be important for bond funds.

Investors in a few bond funds, who invested in January 2003, would be faced with a capital erosion till date.

If you are not confident about getting the timing right, you can use a couple of devices to even out the effects of timing. You can phase out investments (and redemptions) through the systematic investment (and withdrawal plans) offered by fund houses. These plans help you to invest in small instalments spread out over a period of time.

You can also actively re-balance your mutual fund portfolio from year to year. To re-balance you need to evaluate the equity:debt:liquid proportion in your portfolio periodically (say, annually) and shift between asset classes to get back to the proportion that you are most comfortable with. This will make sure that you sell part of your equity or bond fund whenever there is a sharp appreciation in value and switch this investment to the alternative asset class.

Periodically evaluating the Net Asset Values and the portfolios of your mutual fund investments has definite advantages.

It will help you identify a slippage in performance or a deviation in investment style (from what was promised in the offer document) at the earliest opportunity. What is more, it will help you take remedial action before it weighs on your investment returns.

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