Be mindful of Asset Allocation


By Sankaran Naren, ED & CIO – ICICI Prudential AMC

The Indian equity market has been fairly resilient since the start of the year. This has been largely on account of global liquidity coupled with the pro-growth stance by the Government as could be seen through the various announcements made during the Budget. FIIs too have been positive on Indian equities as India appears to be a bright spot among the emerging markets. This largely on account of the decline in COVID-19 infection rates compared to Developed Market peers and other  emerging markets. Furthermore, Vaccine rollout too, is gathering pace in an efficient manner considering the huge population of a country like India.

Market Risks

Given that equity as an asset class has rallied continuously, one has to be cautious. We are balanced between risk of inflation, yields and crude oil prices, all going up. So market is likely to be volatile. On the other hand when it comes to debt, there is a risk of interest rates going up as well. As a result, we are at a stage where both equity and debt markets have their own  challenges. The optimal approach at such a time is to practice asset allocation through categories such as dynamically managed asset allocation schemes.

Balanced Advantage Category

What asset allocation does is spread one’s investment across equity, debt etc, rather than going overboard on any one particular asset class. This will ensure that whenever there is any correction, the portfolio is not adversely impacted. One can also achieve this through investing in balanced advantage category of schemes which tend to gain from market volatility by participating in the rally through equity allocations while the presence of debt limits downside to the portfolio.

In the balanced advantage category of schemes, investors have the opportunity to diversify their investments across equity as well as debt, within a  single scheme. The assets here are invested into debt or equity based on their relative market attractiveness. For deciding on the equity allocation, various fund  houses use a variety of market parameters such as price-to-earnings, price-to-book etc. to reach on the market valuation. If the equity market valuation is low, the fund is expected to raise its equity exposure and as the valuations start getting expensive the allocation towards debt is increased. In effect, the fund truly helps an investor to Buy Low and Sell High. Plus, the presence of arbitrage provides unique flexibility to such schemes to hedge part of their portfolio against market volatility.


Because of its composition, such a fund is ideal for an individual across risk profiles. While equity creates   long-term wealth, the presence of debt provides stability to portfolio there cushioning the investment during times of extreme market volatility. Furthermore, diversification across the equity and debt not only lends stability to your portfolio but also helps generate better risk adjusted returns.

At a time when the markets have staged a runaway rally and the road ahead is likely to be fraught with   volatility, the relevance of such scheme increases   manifold. Given that, on equity valuation basis the   Indian market is no longer cheap; such a scheme will aid an investor in taking exposure to equities in a     conservative manner. Also, such scheme can be used for the first time investors as a stepping stone into   equity markets. By staying invested in such a scheme, one gets to experience equity markets and over time can consider making measured investment into fully invested equity schemes.

To conclude, a balanced advantage category of scheme emerges as a one stop solution for your asset allocation needs and hence can be considered for lump sum investment.


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