When markets turn volatile, retail investors typically tend to shy away from equities. Just like
the fear of missing out may have pushed them into investing even at market highs, the fear
of losing money takes the front seat once the market starts offering a rollercoaster ride. More
often than not, it is the emotion based investment decisions which does more harm to the
portfolio than the market up and downs. Therefore, at times of market correction, investors
tend to lower their allocation in equities, when ideally they should be increasing, since stocks
are available at reasonable valuations.
Once you are convinced that you have invested in fundamentally sound companies with high
standards of Corporate Governance, such volatile waves should hardly bother you as an
investor; as such companies have the ability to rebound from the market lows. For example:
After the market fall in 2008, the BSE Sensex rose 52.4 percent in calendar 2009, recouping
all of the losses made in the previous year. This is one example which highlights the benefit
of staying invested through the market cycles.
The emergence of Dynamic Asset Allocation Funds
The mutual fund industry, taking cognizance of such investment behaviour, introduced a
product known as dynamic asset allocation funds. Such funds are designed to invest in
equity and debt asset classes in a dynamic manner, depending on the market valuations. In
simple words, they use the ‘buy low and sell high’ methodology to invest in equities. In case
the overall market scenario seems expensive, the allocation towards equities will be reduced
by booking profits and allocating more funds towards debt. Similarly, when the markets are
cheap, the fund allocation increases towards equity for better returns in the future. As the
asset allocation decisions are based on scientific methods, it helps the investors keep
sentiments away, thereby preventing him from going overboard while investing in a particular
asset class.
Why should such fund be considered for investment?
It is always advised not to put all your eggs in one basket. That is what diversification or
asset allocation is about – spreading investments over a variety of assets to reduce overall
portfolio investment risk. Thus, asset allocation becomes the key to long-term wealth
creation, a fact which is often missed by the investors.
This is where dynamic asset allocation funds come in handy, as the investment made is
spread across equity and debt asset classes, thereby automatically diversifying the portfolio.
Further, the higher allocation is made towards specific asset class that is relatively favorable
under the market conditions and valuation metrics. Hence, it is worthwhile to consider such
funds for lump sum investment, since this fund helps optimize returns and lower risks by
investing in appropriate asset classes in varying market cycles.
Such an arrangement is also better placed than investing individually in equity and debt, for
retail investors on multiple accounts. First, it saves investors time and energy in actively
tracking the market and making the required changes to the portfolio in terms of asset
allocation. Secondly, when investing individually into debt and equity, individuals may end up
attracting tax incidences when rebalancing.
Relevance in Current Market Situation
Currently, the markets have turned volatile owing to the various global and domestic
developments. Also, it is very likely that such market conditions may prevail over the next 12
to 18 months, especially in light of the upcoming general elections and increasing risks of
trade wars. In such a scenario, dynamic asset allocation is best placed to aid investors to
make the most of the volatile market situations. Therefore, it is best to make such dynamic
asset allocation fund as a part of one’s core portfolio, given that such a fund will help make
good of any market situation thereby helping the investor to build a healthy corpus over
longer investment horizon.
Table:
Benefits of DAAF
– Removes the psychological barrier of Greed & Fear
– Allocates higher in equity when the equity market valuation is low and lower when the
equity market valuation is high
– Better placed than static asset allocation
– For taxation purpose, is treated as an equity fund
– Aids in wealth creation in an up-trending markets while limits downside in a market
correction