We have often heard of the risks of investing in equity markets, whether directly in stocks or through mutual funds; but 2020 was, as in many other ways, quite different. It taught investors the risks of not investing in equities and a high level of regret. First, let us do a flashback.
The markets in 2020 started the year with Sensex levels of over 41000 and peaked on January 17. February was a bit of a stumble – a 6% fall, before the next three-week tumble of 32%. On March 23, investors were staring at an endless abyss. The fall came without much warning and financial advisors were like drowning men trying to clutch at straws, and at the same time hand hold their investors through these tumultuous times.
As it happens in the movies, the next shot was that of the calm after the storm and quietly, a 30% rally over the next five weeks ensued. Investors were calmer; but were waiting for an imminent fall to invest. Within the next three weeks, the Sensex fell 10% – and as an investor you were grateful that you were not lured into investing during the April rally. Again, and equally swiftly, a 15% rally in the next three weeks had you think that you missed the boat once again.
Our role as a financial advisor involves, among other things, taking tactical calls but more importantly strategically ensuring that the asset allocation to equity is aligned to your goals as well as your risk profile. We do not get in or get out of the market fully, and hand hold the investor to staying within the boundaries so that he benefits from the upside of markets, as also does not take undue risks. As you can well imagine, in 2020, it was a tall ask.
Worries in equity markets increase when all and sundry start advising on the stock to buy – the worries grow manifold when investments are made from leveraged positions – borrowing cheap to try and make a quick buck. Neither of these situations prevail at the moment, so the focus has to be on profitability of companies which is showing an upward trend.
As an investor, if you have exited at sub-30000 levels, you are waiting perennially for “Godot” – there are others in the queue who will deploy their cash earlier than you, and your turn may never come. At a time like this, how can you participate in the equity markets? First, do ensure you speak to your financial advisor and ensure that you take the risks commensurate with what you are comfortable with. Next, consider this alternative from among mutual funds which might be the answer to your prayers: dynamic asset allocation funds or balanced advantage funds.
As the name suggests, these funds automatically adjust the level of equity in line with the markets – as the Sensex levels go up, their allocation to equity comes down; and as the market gets cheaper, they increase their equity allocation. The category of fund is not without risk since it will always have some equity allocation. Considering the fact that markets may remain volatile over the next six months or so, and opportunities to invest may exist during that time as well, this is a good category to invest in. During the tumultuous 2020, these funds increased their allocation to equity to nearly 90% during the end of March and have steadily been bringing down the allocation during the sharp rally in the last quarter of 2020.
|Scheme name||1-year returns (%)|
|Edelweiss Balanced Advantage||27.80|
|Baroda Dynamic Equity||27.45|
|ABSL Asset Allocator FoF||25.09|
(Source: Value Research)
If despite having an advisor, you feel nervous to invest in equity markets, although you have the risk profile to do so, the dynamic asset allocation fund category may be just right for you. While following only past returns may not be the best way to judge a fund, choose from among the category wisely.
( The author is a CFP and CeFT, and is the Managing Director & CEO of International Money Matters, a SEBI-registered Investment Advisory firm. He can be reached at [email protected])