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How friendly asset allocation can help your investment journey

Beyond the ongoing pandemic, one thing that is happening in the current market and what March 2020 has in common is a question in the minds of investors. The financial markets were volatile. The S & P BSE Sensex fell to a few years’ lows in March 2020, down 37% from the beginning of 2020 and rising nearly 2.4 times by October 2021. The 10-year G-Sec yield during this period is also very volatile, dropping from 6.5% in January 2020 to 5.8% in May 2020 and rising again to 6.3% in October 2021. bottom.

Today, when stock markets are said to be at the highest levels in history and bond yields are said to be at the lowest levels, the problem that continues to return to investors remains the same. “Where, from here?” No one has the answer, but there are people who can see you through market uncertainty, investment journey best friends, and asset allocation.

While the market is certainly on the rise in the long run, it is also certain that this journey is not entirely smooth. There are bouts of corrections in the market, and you definitely don’t want these periods of volatility to cut into most of your investment. Investing across asset classes such as equity, debt and gold helps diversify your investment and mitigate the risk of your entire portfolio. Figure 1 shows the average correlation between the three asset classes over the period April 2005-October 2021.

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A low correlation means that the relationships between the asset classes mentioned above are not strong and are unlikely to yield the same benefits as another asset class over a particular period of time. It is this performance gap that helps mitigate portfolio risk, as the weak performance of one asset class can be offset by the relatively strong performance of another asset class. Therefore, combining asset classes provides optimal risk-adjusted returns. Chart 2 shows the calendar year performance of the Equity Index and the Dead Index, as well as the returns of the 50/50 Hybrid Index. There are two ways to diversify your portfolio: DIY or do-it-yourself routes and relying on the expertise of professional fund managers. Proper asset allocation requires a deep understanding of all asset classes and the specific products underneath. Tracking all market and economic parameters and adjusting your portfolio in response to changing market dynamics can be a bit difficult. In addition, rebalancing the portfolio to reflect optimal asset allocation can incur various costs such as exit load, short-term or long-term capital gains taxes, and other transaction costs as needed. I have. However, if you routinely track the market and are not unaware of the nuances of each asset class, the second option is for you. By investing in a hybrid fund, you can manage your portfolio’s asset allocation needs.

Hybrid funds invest in different asset classes. This diversification allows us to participate in the rise of the up market and help protect us from the downturn of the down market. In addition, the appropriate asset allocation combination based on market conditions is managed within the fund by the fund manager and does not lead to additional charges / costs / taxes.

The decision to invest in these funds should be based on the current portfolio, duration and risk appetite. These funds invest most of their portfolio in bonds that provide stability and a small portion of their portfolio in equities that can provide opportunities for capital appreciation. Aggressive hybrid funds are highly allocated to equities and only a small portion is invested in bonds. This can be a fund for you if you are comfortable taking relatively high risk and want to invest primarily in stocks. Next, there is a dynamic asset allocation fund that allows you to freely change the asset allocation based on the views of the fund manager in the market. These funds tend to increase their equity exposure when the market is expected to rise and decrease their equity exposure when the market begins to show signs of correction. This not only allows you to attend market rallies, but also gives you a cushion when the market is modified.

DP Shin is the Chief Business Officer of the SBI Mutual Fund.

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How friendly asset allocation can help your investment journey

Source link How friendly asset allocation can help your investment journey

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