By K P Venkataramakrishnan, Founder, VIRUKSHAM FINANCIAL SERVICES
Currently there is high volatility in the market due to fear of coronavirus pandemic and has rattled the equity markets world over. It is natural for retail investors to panic at such times given that such sharp corrections don’t generally occur. Individuals who have witnessed the 2008 correction too were taken aback by the swiftness in market correction seen in Indian indices.
For those investors invested in dynamic asset-allocation funds, especially balanced advantage category of funds, the impact has been minimal. The reason – Such funds cut back on their equity exposure as markets scaled higher levels. A key advantage of these funds is that to manage risk and reduce it they invest in different assets such as bonds and equity. Hence, for a vast majority of investors who would like to tailor investments depending on equity markets, these funds prove to be both profitable and defensive.
A valuations-first strategy
Dynamic asset-allocation funds factor in market valuations before investing in various assets. An important criterion which helps decide when one should move into equities is the underlying market valuation or markers such as price-earnings or price-to-book value.
When equity markets climb higher, dynamic asset-allocation funds get busy booking profit and moving out of equities. The PE or the price-to-book in a rising market is constantly rising. At every increase, these funds are locking in profits and shifting allocation to debt.
Suffice it to say, dynamic asset-allocation funds raise the investing strategy several notches. They not only give the investor an advantage of booking profits in stocks, but also ensure that any downside is protected.
Sidesteps emotions
In times of a market correction, usually the investor reacts in the extreme, which is to sell all the holdings, instead of accumulating at lower levels. So, here the decision is based on emotions. By investing in dynamic asset-allocation funds, one gets to sidestep emotion based investments.
As a result, dynamic asset-allocation funds are excellent investment vehicles for volatile times. The reason being such a fund gets to invest at opportune times into debt and equity, thereby containing either ends of the market extremes. In effect, it aids the investor to not only reduce risk but also face market volatility with confidence.
Suitable for…
Owing to the nature of the product, this type of a fund can be used as a stepping stone when it comes to investing into equities. A risk-averse investor can also consider investing in this fund. Ideally one should consider having this category of fund as a core part of one’s portfolio. In the current market environment, for those looking to make lump sum investment can consider locking in money into this fund, given the inherent asset allocation exercise.
Among the balanced advantage category of funds, there is one name that stands out. It is ICICI Prudential managed Balanced Advantage Fund. This fund is considered a pioneer in its category. It is also the oldest among dynamically managed asset allocation schemes. The model which is used to decide on this Scheme’s equity allocation is a decade old and is time tested. Most of the schemes existing in this category has been launched within the past couple of years, especially post SEBI’s re-categorization exercise.
Owing to its decade long existence, it is the only fund in this category which has seen a complete market cycle. Also, it has been a consistent performer, helping investors navigate all forms of market conditions smoothly.
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