Indeed, asset allocation can be one of the greatest shock-proof strategies for long term investors. Asset allocation in equities would simply mean multi-cap investing, which allows a portfolio to be diversified across sectors and market capitalisation.
Multi-cap funds or even equity diversified funds for that matter are great exponents of asset allocation across sectors and market capitalisation.
Multi-cap funds normally invest in large cap, mid-cap and small cap stocks; and do not necessarily get confined to large cap stocks. This factor, over the long term, turns out to be extremely beneficial for investors.
The fund manager can play on the momentum and leverage the market movements. For e.g., an analysis of past five years shows that fund managers were able to successfully shift exposure from large cap to mid-cap after 2013. This is the period which saw the mid-cap sector outperforming large caps.
The flexibility afforded in the multi-cap investing brings in stability in the mutual fund performance, as a proper balance between large, mid and small cap stocks is at work.
Historical data suggests that the multi-cap funds have generated returns higher than the benchmark indices.