(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.
