Asset Allocator: The Right Choice

Asset Allocator: The Right Choice

Ambrish Agarwal
Director, Eastern Financiers Ltd


Bull markets can spell tough times for prudent investors trying to strike a balance between enjoying the ride in stock prices and shielding the portfolio against a sudden fall. The present bull market is no exception. With the Sensex more than doubling from its March 2020 lows, the last 18 months have certainly been rewarding for investors who have kept faith in equities. But there’s no getting away from the fact that with market valuations well above long-term averages and macro risks looming, equity investors need to brace for a bumpier ride ahead.

From the pace of India’s recovery post-pandemic to RBI and Federal Reserve policies on normalising rates, to sticky inflation and state elections, there are quite a few upcoming events that could precipitate two-way market moves. Should earnings or growth disappoint, investors also need to prepare for a valuation reset. Faced with such known unknowns, investors often tend towards extremes. Some over-cautious investors have jumped completely off the equity bandwagon in early 2020 to wait for a further correction, but that has led to missed opportunities.

Aggressive investors have let their equity allocations rise without check, but they risk losing money as market volatility picks up. The solution to this eternal dilemma lies in prudent asset allocation. But this is easier said than done. Even if you are good at timing and have your entry and exit strategy all mapped out in your mind, putting tactical allocation moves into action presents practical difficulties. First, there are behavioural biases that will egg you on to postpone your rebalancing. With FOMO, it’s quite difficult to jump off a speeding equity train to invest in low-return debt investments. Two, you may face time constraints in putting your tactical allocation plan into action. If you own a fairly large portfolio, deciding what to sell and what to retain, and implementing this, can take time. You also need to factor in variables such as short versus long-term capital gains implications and the exit load structure of your funds, while rebalancing.

Asset Allocation Schemes

Helping an investor overcome such dilemmas is the balanced advantage fund (BAF) or the dynamically managed asset allocation scheme category present within the hybrid mutual fund universe. This category of fund gets around your behavioural biases by automating the rebalancing process mostly based on quantitative models that take emotions out of the decision. BAF juggles between equity and debt asset classes by rebalancing the portfolio as and when required in an attempt to deliver a smoother return journey to investors.

In order to take advantage of equity taxation, such funds always own a gross equity position that is above 65 per cent. But to reduce risks and usher in benefits of dynamic allocation they use a combination of pure equity exposures and derivatives to make up this equity allocation. When market levels are high, BAFs own a low net equity position, with higher debt assets. When markets fall, they add to their net equity positions, thereby helping an investor to buy low and sell high. In a rising market, the pure equity portion offers participation in upside. In falling markets, derivative positions hedge against downside and in flat markets, the debt allocation props up returns.

However, within this category, there is a wide variety in terms of how the house houses choose to manage their portfolio. Broadly, there are three ways in which funds are managed within this category. There are schemes which maintain a high exposure to equities, i.e. upwards of 70 per cent while on the other end there are funds with very conservative equity allocation i.e. less than 20 per cent and the third option is the middle-of-the-ground approach with equity allocation hovering between 35-40 per cent. In an up-trending market, higher equity allocation will surely be a winner but as the market turns volatile, middle-ofthe- ground approach tends to be very helpful.

In case an investor is looking to add gold to the mix of asset classes, then an interesting option to consider is the Asset Allocator Fund. The interesting aspect is that the fund has a fund of fund structure which allows the fund manager to take exposure to a wide spectrum of market instruments and segments within a single fund. To conclude, if you are an investor looking for lump sum investment opportunities in the current market environment, an asset allocator or BAF can be your first order of consideration.

The writer is Director, Eastern Financiers Ltd
• Email: Ambrish@easternfin.com
• Website: www.easternfin.com

 

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