Looking for an all-in-one fund to ride market volatility?
The stock market is just like the weather - it's unpredictable. Volatility is a part and parcel of capital markets and investment journey. For new/few investors, this may create stress and confusion. Asset allocation helps to a certain extent to remain at peace during volatility. But the main question arises – which asset to invest in? Debt or Equity? How to decide?
Are you looking for an all-weather scheme that has asset allocation built in it? Dynamic asset allocation funds can be your answer.
Equity as an asset class is associated with high volatility and this is the key reason why most investors tend to stay away from equities or under allocate to equities, despite the strong long-term return potential of this asset class. Such cautious investors fearful of high volatility could consider investing in funds which dynamically manage equity allocation based on valuation level – i.e. increase equity exposure when markets are cheap and reduce equity exposure when markets are expensive.
Historical data suggests that such a strategy helps in taming the volatility and yet helps investors participate in the long-term growth potential of equities. Dynamic asset allocation funds, also known as balanced advantage fund, are actively managed and invest in a mix of debt and equity depending on market movements. They increase/decrease their allocation to equities and debt depending on their view of the stock markets. It does not aim to outperform pure equity strategies.
How do Dynamic Asset Allocation Funds work?
These funds essentially work on the investing strategy that allows it to adjust the mix of equity and debt component depending on the view of the stock market and prevailing economic conditions to help mitigate risk.
The portfolio model is derived from various fundamental and technical indicators which allow the fund managers to increase or decrease allocation to equity. So ideally when valuations are low, fund houses increase equity in the portfolio and vice versa. Calculation methodology could vary from fund house to fund house.
Among the metrics that may be considered for deciding the debt-equity mix at any point of time could be the interest rate cycle, equity valuations, medium to long term outlook of the asset class, etc.
Why invest in Dynamic Asset Allocation Funds?
- These funds help investors participate in the long term growth potential of equities but with a much lower volatility
- They help in systematically managing equity and debt allocation based on valuations and keep emotions away from asset allocation decisions
- History suggests that sharp corrections in the market typically occur when equity valuations are expensive. Due to the fund’s strategy of maintaining low equity allocation at higher valuation levels, it could help reduce downside significantly during such market corrections
- Potential to substantially improve the risk-adjusted return for medium to long term investors
- These funds provide a tax-efficient and cost-efficient dynamic asset allocation solution – taxation similar to equity-oriented schemes
Who are these funds suitable for?
- Cautious investors with a relatively low-risk appetite, looking to benefit from the long term potential of equities
- Investors sitting on the sidelines, waiting for the appropriate market valuation level to make an investment in equities
- Investors planning for their long term financial goals such as retirement could look to invest through SIP or lump sum route
Investment decisions often involve finding the right balance between various asset classes through unpredictable market conditions. And dynamic asset allocation does that – it provides a mechanism that intends to combine the unique benefits of equity and debt based on market valuation. This strategy is ideal for investors seeking stable risk-adjusted returns with lower drawdown over long-term investment horizons.
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