Skip to main content

Target based strategy is vital for volatile markets

 

BEAR markets make investors wary and many desist from making fresh investments fearing stagnation or losses. But, review of historic data reveals that over the past one decade, irrespective of a bull or bear phase, there was over a 30 per cent chance that around 12 per cent returns would accrue over a three-month period.

(Source: MFI Explorer, http://www.bseindia.com). On the other hand, bull markets create euphoria, leading investors to continue to invest at expensive valuations, thereby, increasing downside risks. So, it is good strategy to invest for a long term, but it is also essen tial to keep a target and follow a prudent divestment strategy based on asset allocation.

As an investor toils over the dilemma of which approach to take, the most effective and fundamental principals of investing often are overlooked -that of asset allocation and objective-oriented investment strategy.

In an environment where volatility is expected to be the only constant, is there a way that investors can create wealth for themselves? The answer is a simple `yes' and usually lies in the most fundamental basis of investing -asset allocation and goals.
Efficient asset allocation means investing in underperforming asset classes and reducing exposure in outperforming asset classes. This would have meant investing in equity from 2001 to 2003, investing in equity in 2008 and increasing exposure to debt in 2009 after the elections. Within equities, it would have meant investing in defensive sectors like technology, pharma in 2007, investing in mid-caps in 2008 and investing in infrastructure in 2009.


Asset allocation is, therefore, about removing emotional biases in investing.

Hence, in the present environment marked by volatility, investors need to follow asset allocation strategies or invest in funds that facilitate asset allocation.
With time and resource bandwidth being constraints, options in the mutual fund space, such as asset allocation of funds and trigger-based funds, would help investors get better returns.

In case of diversified funds with dynamic asset allocation, the allotment keeps varying across various assets class equity and debt depending on market movements. This approach reduces exposure to equities when the market is high and vice-versa and would be a safer and profitable option for investors. Also, straddling across market capitalisation with equity, based on the valuation attractiveness, also helps generate alpha for asset allocation funds. ICICI Prudential Dynamic Plan is one such fund. It is a blend of aggression and defence in the present equity market scenario. The fund with its mandate to take market capitalisation and cash calls based on valuation helps investors effectively capi talise on volatility. The other option of objective-based trigger funds can help investors take decisions on investment goals. All of us have a tendency to get greedy on the upside or to chase losses on the downside.


When markets start moving up, investors often shift their previously set target upwards, without booking profits. Realisation sets in only when markets correct and reaches levels where investors either end up not gaining, or, sometimes, even losing their investment.

Triggers manifest investment objectives of investors, where, by sticking to pre-set targets an investor can avoid getting too greedy when he or she has already made a healthy profit and met investment objectives. The entry trigger, on the other hand, helps an investor enter equities when valuations are correcting. In line with the philosophy, `Buy on bad news and sell on good news' -when equity markets are rising and hitting targets, the pre-set trigger helps investors rebalance their investments. The strategy enables investors to buy into equity when markets are falling and acts as an asset allocation rebalancing tool and keeps emotion and sentiment out of the investment process.

Hence, instead of investors standing on the sidelines and worrying on timing and, thereby, losing opportunity, the above strategy of asset allocation and goal-setting provides the fundamental solution for wealth creation.

Popular posts from this blog

Rs 14,000 Crore worth of tax free bonds coming soon from NHAI , PFC

  NHAI, PFC file prospectuses, coupon rate not yet decided MORE debt investment options have opened up for investors with AAA rated tax-free bonds worth over Rs 14,000 crore lined up. The National Highway Authority of India ( NHAI ) and Power Finance Corporation ( PFC ) are offering Rs 10,000 crore and Rs 4,033.13 crore worth of tax-free bonds, respectively, as per prospectuses filed with the Securities and Exchange Board of India (Sebi). Of a Rs 5,000 crore issue by PFC, Rs 966.87 crore has already been raised through private placement on September 28 and November 1. Tax-free bonds give investors tax-free return on any amount invested. In another kind of bonds, the long-term infrastructure bonds, investments up to Rs 20,000 are tax exempt, that is this cap amount can be deducted from the taxable income. Accordingly, the NHAI prospectus has clarified that only the amount of interest from -and not the actual investment on -its new bonds will be tax-free. "NHAI's publ...

Change in Fund Manager for some of HSBC Mutual Fund Schemes

Buy Gold Mutual Funds Invest Mutual Funds Online Download Mutual Fund Application Forms Call 0 94 8300 8300 (India) However, this facility is only available to Unit holders who have been assigned a folio number by the AMC.   HSBC Mutual Fund has announced that the below mentioned schemes shall be managed by the new fund managers as stated in the table. The effective date will be July 02, 2012.   Amaresh Mishra 's will be Vice President and Assistant Fund Manager. Having done a Post graduate diploma in Business Management and Bachelor of Chemical Engineering, he has over seven years of experience in Equities and Sales.   Mr. Piyush Harlalka's designation shall be Vice President- Fixed Income. Qualified as a C.A., C.S. and holding M.B.A.( Finance degree), he has over six years of experience in Fund management and ...

How EEE and EET Tax affect Retirement Investments

  An important factor while choosing a financial product is its taxation , and for retirement savings, this is even more important as the sums involved are usually life-long savings. Here's a look at the current tax treatment of three major long-term retirement planning products, which are - Employees' Provident Fund (EPF), Public Provident Fund (PPF) and National Pension System (NPS). EPF The tax treatment is EEE, which means your money is exempt from taxes at the time of investment, accumulation and withdrawal. At the time of investment, the tax deduction is under the limit of section 80C of the Income-tax Act , which is currently Rs 1.5 lakh. Partial withdrawals are also tax-free if made after 5 years of continuous service. If withdrawals are made before 5 years of service, 10% tax will be deducted at source. Exceptions have also been provided for transfer of amount and conditions wherein the subscriber is unemployed for more than 2 months or the loss of job was beyond th...

Personal Finance: You can insure your wedding

But luck may not always be on your side. With the frequency of such attacks, as also other risks and unforeseen accidents growing, a wedding insurance is something you may want to look at if a marriage is being planned in the family. Event insurance plans like this is still in its nascent stages due to low awareness. And given the sacred nature of the ritual, nobody wants to discuss or think negative. But as wedding spends and risks grow, it makes sense to cover the potential monetary loss. The policy in those countries even covers the loss of the wedding ring, the wedding gown not reaching on time and even the expenses/loss due to late or non-appearance of the photographer which may mean staging the event once again for the photograph. In India, most insurance companies — including ICICI Lombard General Insurance, Oriental Insurance, Bajaj Allianz and National Insurance — offer wedding insurance. The policy is tailor made to individual requirements and needs. The sum insur...

DSP BlackRock MidCap Fund

Best SIP Funds Online   HOW HAS DSP BlackRock Small & Mid Cap Fund PERFORMED? With a 10-year return of 14.61%, the fund has outperformed both the category average (12.34%) and the benchmark (10%) by a good margin. Should you invest in DSP BlackRock Small & Mid Cap Fund? This fund invests predominantly in mid-cap stocks but takes a sizeable exposure in small-caps as well. The focus is on nascent companies with high growth potential. The fund manager places emphasis on quality and avoids inferior businesses even if these look tempting from a valuation perspective. Over the past year, the fund portfolio has grown, having added to some of the underperforming sectors like chemicals and healthcare. Its portfolio churn has come down significantly. The heavily diversified portfolio is run completely agnostic of its benchmark index— most bets are from outside the index—which can at times lead to bouts of underperformance as seen in the recent years....
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now