Beat the heat

Dynamic asset allocation funds are excellent investing vehicles in volatile times


The stock markets have witnessed extreme volatility in the past few years. Earlier this year, they plummeted because of the pandemic but NIFTY bounced back almost to its original level and is trading just short of the all-time high in January. It is natural for retail investors to panic at these times. In 2008 also retail investors witnessed stock market crash and big recovery in a short span of time.

For those who have invested in dynamic asset allocation funds, especially the balanced advantage category of funds, the impact has been minimal. The scheme sharply cuts equity exposure whenever valuation of index is expensive or a valuation-based model that holds lower equity levels at peak valuations. Thus by managing risk in equity and allowing the debt portion to anchor the portfolio, it keeps volatility lower. Hence this strategy is a good investing option in the hybrid equity category in all market conditions.

Fair market value strategy

Accessing the valuations of both debt and equity is an important parameter in dynamic asset allocation schemes. This scheme focuses on underlying valuation like price to earnings and price to book value and in debt, and the fund manager could take duration calls which helps make most of rate cuts and in the low interest rate regime.

Basically the scheme rebalances the portfolio according to the fair market of equity, and helps in booking the profits in the equity portion during expensive valuation and moving to debt. For example, BAF model sold equity in January and Feb 2020, and booked profits and reduced equity level to as low as 30 per cent. It gradually increased equity levels post-crash in March, April, and May to as high as 80 per cent.

Hence, dynamic asset allocation funds prove to be worth considering in all market conditions as this category books profit in stocks and also is a testament to this downside protection in the equity market. Thus, the category also helps the process of compounding with lower volatility in the long term.

Behavioural bias

In the times of stock market crash, investors tend to panic, decide differently under pressure and sell equity holdings instead of accumulating at lower levels. It is a human reaction to feel uncomfortable to see equity portfolios down. The psychology of investing says investors naturally have cognitive biases that affect portfolio-related decisions.

In this testing time, by investing in dynamic asset allocations funds, one gets logical based investing and to avoid emotions based investing. As a result, the dynamic asset allocation category creates volatility-proof portfolios and leads to smoother investment experience and maximises investors’ returns and minimises investors’ risks.

Dynamic allocation funds should be the core portfolio for first-time investors who have low risk appetite and for risk averse investors. Ideally, one should consider having this category of schemes in the current turbulent market environment.

Among the balanced advantage category of funds there is one name that stands out-ICICI Prudential Balanced Advantage Fund. Considered a pioneer in its category, it is the second-largest scheme in this category with assets close to Rs27,000 crore, and it takes into consideration an in-house model that primarily looks at price-to-book model and decides on net equity asset allocation (30-80 per cent).

It is a time-tested scheme with prudent asset allocation with more than 10 years’ track record and has seen a complete market cycle. Most of the schemes in this category have been launched within the past few years, especially post SEBI’s re-categorisation exercise.

Author is the founder of