Afraid of an equity market correction? Adopt a strategy to limit the risks on investments
A successful portfolio is one where there is a balance among the various asset classes and a conservatively managed
The Indian equity markets have seen a sharp rise after the Covid-19 fuelled tumble in early 2020. From the bottom touched towards end of March 2020, the broader stock market indices like BSE Sensex and Nifty 50 have more than doubled. At a granular level, some individual stocks have turned out to be multi-baggers in the last one year, spreading a wave of euphoria and optimism in the investor community.
While the rising awareness around equity investments is a positive development when compared to the traditional aversion to equity, a word of caution is in order. Financial planners often highlight the risk of a skewed asset allocation in favour of any asset class. Hence, it is crucial to sit back, analyse your portfolio and make necessary adjustments, taking into consideration one’s asset allocation.
What is asset allocation?
Asset allocation is the practice of allocating your investable corpus across different asset classes. This ensures that the portfolio does not face undue risk because of any major development in a single asset class. While the fundamental driver behind deciding asset allocation for any investor is their risk appetite and financial goals, some situations also demand taking a look at some other parameters as well.
Owing to the current equity market rally, the equity allocation in one’s portfolio too would have been distorted. This calls for a rebalancing exercise. While this may sound easy in theory, putting this in to practice might get tricky due to emotions such as greed and fear. A better way of handling such situations is choosing a mutual fund that does all this work for you. One option that stands out for investors facing this challenge is the category of Balanced Advantage Fund.
What is a Balanced Advantage Fund?
As per market regulator SEBI, this is a mutual fund scheme which allows dynamic asset allocation. In other words, unlike equity or debt mutual funds, where the fund managers have to maintain a significant chunk of assets in a fund invested in a particular asset class, in Balanced Advantage Fund, the fund manager can freely move the investments from one asset class to another.
Further, the strategies adopted by fund houses for their schemes also determine how this freedom can be used to generate better returns for investors. For example, the ICICI Prudential Balanced Advantage Fund allocates higher to equity when the equity valuation is cheap and reduces equity allocation as the valuation becomes expensive. Different fund houses use different market metrics such as price to book value or price to equity ratio to decide on the market valuation aspect.
Strategy in action
There are several offerings with the BAF category and each is unique in the way it is managed. Some funds are model-based wherein the asset class allocation is basis the model while some others are momentum-based or is largely static in nature. In an up-trending market like the one currently, BAF which has higher equity allocation seems to be better placed in terms of performance. However, the true test of the offering can be only gauged across a complete market cycle.
If you are an investor who is looking for asset allocation, then the prudent choice would be to consider BAF which are conservatively managed. In such a fund, the equity allocation reduces as the market valuation becomes expensive. This is done by booking profits in equity and deploying the same in debt. Owing to this approach, an investor gets to truly ‘buy low’ and ‘sell high’. Also, such an approach ensures that your portfolio volatility is minimal even in case if the equity markets were to face a correction or there is a spike in volatility.
One such fund which helps an investor achieve this kind of asset allocation is the ICICI Prudential Balanced Advantage Fund. This fund at the peak of market correction had an equity allocation of 74% which post the market rally today stands at 35% as of October 2021. This fund which is also among the oldest with over a decade long track record shows that such a strategy followed has been beneficial for the investors.
To conclude, a successful portfolio is one where there is balance among the various asset classes and a conservatively managed BAF helps you achieve just that.
(The author is the Founder of InvestWise. Views expressed are personal)