The Mutual Fund Show | Static Or Dynamic Asset Allocation: What Works Better?

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Asset allocation is a key element of investing. But what’s better—static allocation funds that retain the portfolio mix or the ones that actively alter allocation based on relevant trends?

An investor spends too much time or focus on trying to “time the market”, which yields less than 2%, while ignoring asset allocation that constitutes more than 90% of investors’ returns, according to Swarup Mohanty, chief executive officer at Mirae Asset Investment Managers. It’s impossible to predict which asset class will outperform as winners keep on rotating; so asset allocation remains the middle way to give equity-linked returns with much lower volatility, he said on BloombergQuint’s weekly special series The Mutual Fund Show.

And since volatility is the only trend in equity market, static allocation funds—that allocate a pre-decided percentage to different asset classes—will work better across time periods, and are the better way to invest, Mohanty said. Aggressive hybrid funds, which are balanced funds that invest primarily in stocks with some allocation to fixed deposit-like instruments, have done better than dynamic asset allocation funds.

Salonee Sanghvi, founder of My Wealth Guide, a financial planning advisory, however, differs. While she acknowledged the importance of asset allocation, Sanghvi prefers dynamic asset allocation funds—that make alterations in the proportion of assets based on market fluctuations.

For a new investor, stability of the performance would matter more than the return, she said on the same show. Instead of an investor taking the risk of an aggressive hybrid fund, they are better off segregating the equity and the debt portfolio themselves, and investing in pure-play equity funds and pure-play debt funds separately, Sanghvi said.

On BFSI funds, Sanghvi said that since most large caps and flexi caps already have 30-40% exposure to financial services, in line with the broader index, a separate BFSI fund is not necessary. But for aggressive investors, a BFSI fund could form a part of their satellite portfolio, she said.

On debt funds of less than six months, Sanghvi said safety of capital and liquidity is of prime importance, advising investors to look at money market funds that are expected to yield 4-4.5% with a portfolio of largely A1+ rated and treasury bills.

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