Should one diversify across equity, debt and gold – Features, benefits of asset allocation funds

The fund aims to follow a systematic and process-driven approach to asset allocation with the help of a financial model- based on valuation parameters.

Asset allocation is often considered to be the single most important factor in determining portfolio returns. As an investor, you have various asset classes such as equity, debt and gold to invest in. Allocation of money into a mix of these assets plays an important role in generating a high-risk adjusted return in your investment portfolio. The asset allocation pattern depends on your risk profile and the years to goal but for those who need a helping hand, there are mutual fund schemes to meet this need. HDFC Asset Allocator Fund of Funds is one such scheme (NFO closes April 30) that comes with the objective to seek capital appreciation by managing the asset allocation between equity-oriented, debt-oriented and gold ETF schemes. Amit B Ganatra, Senior Fund Manager, HDFC Asset Management Company in an e-mail interview with FE Online explains the importance of Asset allocation schemes and how they can help investors in creating wealth over the long term.

How asset allocation can help investors ride the volatility that Indian equity markets are currently undergoing?

A well-diversified portfolio across asset classes with low/negative correlation would generally protect investors from market volatility. A diversified portfolio across asset classes like Equity, Debt and Gold depending on their relative attractiveness based on prevailing market conditions would enable investors to generate optimal returns in all market conditions.

What is the investment strategy of HDFC Asset Allocator – Fund of Funds?

HDFC Asset Allocator Fund of Funds is a Fund of Funds scheme that aims to generate capital appreciation by managing the asset allocation between equity-oriented, debt-oriented and gold ETF schemes. The fund aims to follow a systematic and process-driven approach to asset allocation with the help of a financial model- based on valuation parameters. Even within Equity Oriented Schemes, the Scheme will invest in schemes across different categories. The idea is to dispassionately manage an active asset allocation strategy in a disciplined manner with periodic review and rebalancing, which otherwise becomes a challenge for investors.

What are the benefits of investing in asset allocation funds, and why the investor should consider in these volatile times?

The benefit of investing in asset allocation funds is that as an investor you don’t need to decide on allocation or even timing, the fund will do it through its systematic investment approach. Another advantage of investing in asset allocation funds is that it offers investors an opportunity to invest in different schemes managed by the different fund manager. With investment in a single Fund of fund scheme, the investor can benefit from a diverse investment approach. Therefore, Asset Allocation Fund of Funds could be considered as an option to meet the diversified asset allocation needs of investors.

Historically, during steep market volatility the one we had witnessed during March 2020 and in the past, how asset allocation as a strategy would have worked?

The objective of any asset allocation strategy is to reduce portfolio volatility while providing the twin objective of growth and stability with an aim to generate optimal returns. The backtesting of the model-driven proposed investment strategy for HDFC Asset Allocator Fund of Funds shows downside protection during markets corrections in most of the instances. During March 2020 when the 3-month cumulative fall of NIFTY 50 was more than -30%, the portfolio falls in asset allocation model strategy was close to -20%. Thus based on valuations, the model indicated a reasonably optimal asset allocation and resultantly downside was protected. The above results are based on past performance the future results may materially vary.

How risk-averse investors can take advantage of the growth potential of equity markets through asset allocation funds.

A systematic and process-driven asset allocation strategy can combine asset classes with low/negative correlation and in the process improve risk-adjusted returns for Investors. HDFC Asset Allocator Fund of Funds through its proposed systematic and process-driven asset allocation strategy aims at an optimal balance of risk and return, where the fund participates in equity but with much lower volatility. The Fund will be managed dynamically keeping in view the valuation parameters and will endeavour to capture the growth potential of Equity.

In the current market backdrop, how should investors realign their portfolio and what should be the investment strategy for the fiscal year 2022?

Markets are in the process of crystalising and discounting FY22E earnings expectation. Based on current vaccination trends and learning from other countries which are ahead in their vaccination drive – India’s covid situation should improve in the next few months.

However, in the meantime – rising cases and lockdowns could result in small earnings downgrades across domestic cyclical sectors. However these sectors have witnessed correction from recent peaks and to that extent – pain is already being reflected in current valuations. An ideal portfolio in current market circumstances should have an optimum mix of Equity, Debt and Gold. Within equities also the portfolio could be diversified across all segments.