Prudent steps

Ways to balance investment risks in unsettling times


The ongoing spread of Covid-19 has rattled equity markets the world over. The pandemic has resulted in sharp corrections in the markets. For instance, the benchmark BSE Sensex in India dropped from a peak of close to 42,000 to below 26,000 between January and mid-March. While there has been some upward movement in the past few days due to global and national-level actions to deal with the Covid-19 impact on economy and society in general, the market continues to remain extremely volatile.

The market correction has resulted in sharp fall in most people’s portfolios as the gains accumulated over several years have taken a severe beating.

To deal with such situations, mutual funds have a specific category of schemes called the balanced advantage funds.

What are Balanced Advantage Funds?

The Securities and Exchange Board of India, which regulates mutual funds and overall capital markets in India, has categorised balanced advantage or dynamic asset allocation funds as open-ended dynamic asset allocation funds. These funds are a part of the hybrid schemes basket. This essentially means that these funds are allowed to change allocation from equity to debt or vice-versa, as and when required. Unlike other funds like equity or debt funds, the market regulator has not specified any asset-wise investment limits for these funds. However, asset management companies have their own defined limits for their own balanced advantage funds.

How do these funds operate?

The underlying principle for these funds is dynamic asset allocation. Asset allocation is nothing but a strategy used to keep the risks in a portfolio under check. This means that the entire corpus or amount being invested or already invested is not put in a single asset class. Parts of the corpus are put in different asset classes to avoid a major setback if any one asset class witnesses a tough phase. For financial investments, asset allocation is maintained by balancing the investments between debt and equity instruments. Following the same principle, balanced advantage funds aim to balance the risks by actively managing the investments going to equity and debt.

What should you do?

While it is always advisable to get an expert view on your finances, it becomes critical in difficult times to entrust the responsibility to experienced professionals. How to deal with your nerves when the market steeply moves downwards or upwards? A reactionary behaviour would be to sell or buy, respectively.

However, a tried and tested model could give measured suggestions on what to do. The benefit of such models is that these cut out the noise that sentiments could create in such situations. The balanced advantage fund by ICICI Prudential Mutual Fund has one such model. This model has been in use for over the past decade and has successfully helped navigate volatile times with ease.

Given its existence for over 10 years now, the model and the ICICI Prudential Balanced Advantage Fund has witnessed multiple sharp movements in the market, both up and down. This fund is the oldest and is considered a pioneer in its category. Also, this is the only fund in its category which has seen a complete market cycle. As the valuation of equity instruments moves to expensive territory, it calls for a reduction of allocation, and vice versa.

If you are an investor struggling with psychological factors in investments like greed and fear, the scheme should be part of your portfolio to bring some much-needed balance.

Kumar is partner, Inwise Wealth Consultancy LLP.