Dynamic asset allocation fund: Get better returns without compromising portfolio safety
Jan 12, 2023, 13:26 IST
Investors tend to stick to just one asset class for their investing needs. An aggressive investor may want to put all the money in equities, a conservative investor may want to opt for debt while some may prefer gold. In the process, what investors often forget is that each asset class caters to different objectives and goes through its own phases of peaks and troughs. By staying invested largely in any single asset class may lead to terrible investment experience, especially during those phases when the asset class one is overweight on is underperforming. Staying invested in just one asset class opens you up to more risk, since your portfolio may feel the heat when the asset class you own is underperforming.
When it comes to equity investing, investors think that security selection or timing the market is the most important aspect to generate healthy returns. But research has shown that asset allocation is crucial to wealth creation. What an investor should realize is that each asset class has its own phases of outperformance, underperformance or sideways movement. Having exposure to the right set of asset classes at the right time across various market cycles is the key determinant for portfolio performance. But this is easier said than done for a first-time investor.
Helping investors address this challenge is the dynamic asset allocation fund. Launched by mutual fund houses as a means to help investors who are unsure with asset allocation, this type of scheme dynamically changes allocation to various asset classes based on the changing market scenario and macro developments. Within the asset allocation universe, there are a variety of ways in which the fund is managed. Some funds follow market metrics to take a call on rebalancing while others use in-house methods to take calls on asset classes. The premise of an asset allocation fund is to help an investor get the asset allocation right, especially during market turbulence. This is done by increasing allocation to equities when the valuation is attractive and vice versa. Similar is the case with debt, gold and any other asset class under consideration. Moreover, each asset class has a unique role to play in a portfolio. For example: the presence of debt ensures there is an element of predictable return and stability to the portfolio. As a result, in times of market rally, an investor gets to participate in the rally through equity allocation and in times of a market correction, the presence of debt ensures downside protection.
At a time when there is a plethora of global uncertainty coupled with elevated equity market valuation of India, for a retail investor investing in dynamically managed asset allocation schemes is an optimal step ahead. Through this category scheme, an investor will get to benefit from domestic equity and also debt given that the bond yields have turned attractive owing to rising interest rates. The allocation to gold (typically less than 10%) will act as a hedge against uncertainties thereby providing further cushion to the portfolio.
One of the examples of an actively managed asset allocation scheme is the ICICI Prudential Asset Allocator Fund. The scheme has a fund of fund structure and has a model based approach when it comes to allocating across various asset classes - equity, debt and gold. The model helps the fund manager decide on the asset allocation aspect. For example: As on 31st December 2022, the fund has just 26% exposure to equities given the elevated market valuation, 65% in debt and the remaining 9% in gold (Data Source: Value Research). Given the dynamic management of the portfolio, the fund over the long term has managed to deliver better investment experience. Over the past three years, with an average monthly net equity at 42%, the fund has managed to deliver a CAGR of 12.8%.
To conclude, to create wealth over the long term, being invested in the right asset class at the right time is the most important aspect. But the tough part for a first-time investor is that one does not have the time and energy to track markets and economy and make changes to the portfolio accordingly, which a fund manager can do diligently. So, if you are a long term investor and are ready to stay invested, then it is best to opt for a dynamically managed asset allocation scheme. The scheme can also be considered for lump sum investment.
Disclaimer: This article is authored by Siddhartha Mehrotra, Founder – ClientsFirst. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class.
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When it comes to equity investing, investors think that security selection or timing the market is the most important aspect to generate healthy returns. But research has shown that asset allocation is crucial to wealth creation. What an investor should realize is that each asset class has its own phases of outperformance, underperformance or sideways movement. Having exposure to the right set of asset classes at the right time across various market cycles is the key determinant for portfolio performance. But this is easier said than done for a first-time investor.
Helping investors address this challenge is the dynamic asset allocation fund. Launched by mutual fund houses as a means to help investors who are unsure with asset allocation, this type of scheme dynamically changes allocation to various asset classes based on the changing market scenario and macro developments. Within the asset allocation universe, there are a variety of ways in which the fund is managed. Some funds follow market metrics to take a call on rebalancing while others use in-house methods to take calls on asset classes. The premise of an asset allocation fund is to help an investor get the asset allocation right, especially during market turbulence. This is done by increasing allocation to equities when the valuation is attractive and vice versa. Similar is the case with debt, gold and any other asset class under consideration. Moreover, each asset class has a unique role to play in a portfolio. For example: the presence of debt ensures there is an element of predictable return and stability to the portfolio. As a result, in times of market rally, an investor gets to participate in the rally through equity allocation and in times of a market correction, the presence of debt ensures downside protection.
At a time when there is a plethora of global uncertainty coupled with elevated equity market valuation of India, for a retail investor investing in dynamically managed asset allocation schemes is an optimal step ahead. Through this category scheme, an investor will get to benefit from domestic equity and also debt given that the bond yields have turned attractive owing to rising interest rates. The allocation to gold (typically less than 10%) will act as a hedge against uncertainties thereby providing further cushion to the portfolio.
One of the examples of an actively managed asset allocation scheme is the ICICI Prudential Asset Allocator Fund. The scheme has a fund of fund structure and has a model based approach when it comes to allocating across various asset classes - equity, debt and gold. The model helps the fund manager decide on the asset allocation aspect. For example: As on 31st December 2022, the fund has just 26% exposure to equities given the elevated market valuation, 65% in debt and the remaining 9% in gold (Data Source: Value Research). Given the dynamic management of the portfolio, the fund over the long term has managed to deliver better investment experience. Over the past three years, with an average monthly net equity at 42%, the fund has managed to deliver a CAGR of 12.8%.
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Disclaimer: This article is authored by Siddhartha Mehrotra, Founder – ClientsFirst. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class.