Dynamic Asset-Allocation: Great Strategy to Beat Market Volatility

Written on Wednesday, May 4, 2016
By Mr. Vijay Thapliyal

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Investing into equity is little tricky, both for new and seasoned investors. There are always some questions looming that “whether the markets are rightly valued?”, “where are they headed to?”, and so on.

Well, there are no quick answers to these questions as the economic environment and the equity markets are very dynamic in nature. If only there was a strategy that took such worries and decisions out of the investors’ mind.

The wisdom of asset-allocation:-

Most investors tend to follow the herd, i.e. they sell when everyone is selling and buy when everyone is buying. This unplanned and random investment usually results in loss. The asset-allocation strategy helps in maintaining discipline and taking sentiment out of investment. It helps you avoid buying in over-heated markets and selling when sentiment is poor. For retail investors, the easiest way to use asset-allocation mechanism is through dynamic  asset- allocation funds.

Dynamic rebalancing:

Dynamic asset-allocation funds allow “buying low and selling high” while keeping human emotions aside. These are structured to invest in equities when markets are cheap and book profits when the markets are rising. The switch between different asset classes can be done daily, monthly or quarterly depending on the mandate of the fund. For example, in case of ICICI Prudential Balanced Advantage Fund, the rebalancing is done on a daily basis. About 30% of the fund’s portfolio could consist of equities when prices are expensive, on the other hand, equity allocation could be as high as 80% when prices are attractive.

Such funds use different parameters to determine the equity allocation in the portfolio. A commonly used parameter is the “price-book value”, which determines a prudent level for entry or exit from equities by evaluating the value of equities based on their intrinsic value. The price-to-book value of the equities is available on daily basis in order to help in determining whether market is overvalued or undervalued. Dynamic asset-allocation funds track the price-book value daily to determine the optimum portion of equities in their portfolio, and accordingly rebalance their assets. On a particular day, if the book value falls to a predetermined level, the fund buys more equities the next day. If the book value falls again, the allocation to equities is increased further. All this is within the limit of equity for the overall portfolio.

A daily rebalancing is done according to the proven yardstick and this is a handy tool for investors. It eliminates emotions, and helps build a robust equity portfolio even in a falling market.

Multi-pronged benefits:

Irrespective of whether you choose equity or fixed income depending on your risk profile and investment preferences, entering the markets through mutual funds give you the benefits of diversification and professional management.

It could, therefore, be a prudent strategy to add flavour of dynamic asset-allocation funds to your investments as these funds strive to deliver superior returns, while reducing risk by following the principle of asset-allocation.

ICICI Prudential Balanced Advantage Fund is an interesting fund in this space, constituted as a blend of large and midcap stocks. It invests in equity ranging between 30%-80% on the basis of a price-to-book yardstick to identify levels at which stocks turn attractive. This product is suited for a varied set of investors; be it a retired individual, a school teacher, or a young IT professional; anyone can aim to benefit from it.

Often, we see, investors investing with an objective of regular cash flow. To fulfil this need of investors, the fund has launched a MoneyBack feature. There is also a Monthly-dividend option; and this fund has a consistent track record of providing monthly dividends, since September 2013. However, dividend is subject to distributable surplus.

MoneyBack feature allows investors to withdraw a fixed sum of money periodically (in this case 0.75% of the invested amount) depending on the option chosen by the investor. For example, basically generating a cash flow of 9% p.a. of the Capital Invested i.e., Rs 90,000 in case of an investment of Rs. 10 lac in a year.

Source: ICICI Prudential Mutual Fund

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