Why asset allocation funds matter


The data suggests that the pandemic effect has prompted investors to consider diversifying their portfolios. There is an issue of managing volatility and making volatility proof investments that seems to be on people’s minds.

With that in mind, Radhika Gupta, CEO of Edelweiss Asset Management Company (AMC), explained on Sunday why a balanced advantage fund (BAF) or dynamic asset allocation fund (DAAF) are now relevant.

“Retail investors never make money. I’ve heard it said a lot. They come at the wrong time, stop SIPs at their bottom, don’t last long enough, abuse small caps, etc. We can choose who to blame. , but it does happen, ”she said on Twitter.

“And it will happen. India is young in terms of financial awareness. Human behavioral bias is a reality. We all want the growth that comes from stock returns, but losing 20-30% isn’t great. bring out the worst in How to make equity work? ”Gupta asked.

According to her, the BAF / DAAF play a crucial role in this scenario.

“By allocating both equity and debt, and doing the job of automatically transferring allocations, they end up generating a significant portion of the return on equity with a lower downside than equity,” said Gupta.

She pointed to the numerical dynamics of the risk involved in such investments, which says that BAFs invest 30% to 80% in stocks and the remaining portfolio is invested in debt.

Niranjan Awasthi, Product and Marketing Manager at Edelweiss AMC, previously pointed out that BAF is unique due to its dynamic nature which allows to manage capital levels between 30 and 80% and even 100% for some funds.

“Typically, all BAF models attempt to achieve a common goal, to reduce the volatility of returns and, more importantly, to protect dips when markets correct sharply,” he wrote.

With reference to this, Gupta went on to explain how asset allocation can be implemented. She said that although the work can be done manually, people can face some challenges.

“1. Rebalancing is less tax efficient than in a BAF structure. 2. Automated asset allocation is difficult to do as a human, and 3. Many of us don’t have the time to do it. ” she said.

“I’ve seen complaints about automated asset allocation models. They’re not perfect, but global experience shows they do a lot better than a human trying to market time. investment process is clear, ”she added.

She went on to say that while BAF isn’t perfect, it delivers a good return result without too much downside. “Pretty good for a lot of us.”

“I use BAF as a substitute for large caps in my personal portfolio. I have been doing a SIP for five+ years with a XIRR of 14% and no sleepless nights. It is a very happy result for me. I add to that with mid caps and global funds for more risk and diversification, ”Gupta said.

“Risk-adjusted return, or just making decent money without too much chaos, is a real investor’s goal. Any tool, including BAF that solves this, has merits. Our state of financial penetration is so poor that perfection is not the result, there is progress, “she added.

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