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Radhika Gupta, CEO of Edelweiss Asset Management Limited gives you a holistic picture of dynamic asset allocation, and the importance it plays when it comes to creating your investment portfolio.
If you were to describe the current market scenario with one word it would be volatile. The news surrounding local and global news items, news surrounding individual stocks has kept investors on their toes. We seem to be living in a VUCA.
V – Volatile
U – Uncertain
A – Ambiguous world
In such a situation when markets are volatile and correct, questions like what should I do, where should I invest and when should I invest or should I not invest at all are bound to cross the minds of different investors. Navigating through these unknown waters requires adapting to changing tides rather than charting a fixed course. In the investment world, adaption is key to survival, hence asset allocation in portfolios should be dynamic rather than static. Asset classes that are doing well should be rewarded, and those that are performing poorly should be avoided. 90% of an investors returns are determined not be the funds they invest in, but by the asset allocation chosen. Being in the right asset class at the right time can make all the difference.
The dynamic asset allocation or balanced advantage category of mutual funds in India addresses exactly this. To know more or invest in the Edelweiss Balanced Advantage Fund visit https://www.edelweissmf.com/types-of-…
What are the different approaches to Dynamic Asset Allocation?
One option is to leave it to the fund manager to make your investment decision for you. However, research has proven that human opinion can be biased. Studies show that experts making decisions for the investment future and slightly better than chance, but in many cases simple algorithms and models have outperformed them because they do not have behavioral bias. The good news is that most dynamic asset allocation funds in India now adopt a disciplined and model driven approach.
1. The most common approach is to asset allocation is the value based or counter cyclical approach. Valuation signals like P/E, P/B and dividend yield are used to adjust the valuations to equities. As valuations fall, equity exposure rises.
2. Second approach is the more pro cyclical approach (less talked about but used extensively). This approach believes that markets are following broad trends. When markets are healthy, the models increase asset allocation and when markets decline the models decrease asset allocation.
Both approaches have their merits and demerits. When markets are trending a pro cyclical approach can yield better results, whereas when markets are slightly on the decline a counter cyclical approach may benefit investors. One thing to keep in mind is that you should follow one approach rather than blending two approaches. Blending these two approaches for dynamic asset allocation won’t give you the desired results.
To know more on the pros and cons of asset allocation you can visit: https://www.edelweissmf.com/investor-…
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