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Last Updated : May 25, 2017 01:26 PM IST | Source:

If timing market is a futile exercise, what is role of ‘Dynamic Asset Allocation’?

Dynamic Asset Allocation is not an impossible task, but definitely a domain area of seasoned investment specialists, who are rational, reasonable and grounded.

A K Sridhar

We read & hear numerous reports and advice about how to save and where to invest one’s hard earned money.  Professional financial advisors and investment specialists always argue, that a common investor should not attempt ‘timing’ the market while investing in equity or debt market, but should look at ‘how long a time’ one should remain invested in the market, to reap the benefits of earning superior returns. They also advocate a common investor including high net-worth individuals (HNIs) to invest in equity market or Equity Funds regularly and systematically through SIPs (Systematic Investment Plan). To ensure investors don’t miss out the long term benefits of earning returns.

If one is to go a little deep into the theory of professional investment management, one can come across a well-argued (and equally well researched) statement saying that ‘more than stock selection’, it is the ‘asset allocation’ that gives you that ‘extra superior returns’. Further, the theory also argues, that to produce ‘alpha’ (excess returns), the money had to be allocated to different asset classes and allocation into each of the asset class need to be altered based on valuations.


In this context, if we take the liberty of defining the ‘asset allocation’ on a much wider framework – i.e. option to invest in one or more category of investments such as debt/bank deposits, real estate, gold, equity, commodity or currency etc., then the ‘asset allocation’ would give a better returns than simply invested in just one asset class (say equity)? The straight answer is ‘YES’, but, only if you are a professional expert and are proficient in choosing the ‘right asset classes’ at the ‘right point of time’. However, if the investor fails to   do that correctly, the outcome might be miserable.

Dynamic Asset Allocation is not an impossible task, but definitely a domain area of seasoned investment specialists, who are rational, reasonable and grounded. If one is willing to restrict the diversity of ‘asset classes’ to just three which are liquid – say equity, debt and cash, it is not uncommon to find success stories that has given such ‘superior returns’ through Dynamic Asset Allocation Strategy Funds. These investment managers may have been little early or little lagged behind the ‘valuation curve’, while switching between asset classes (which they normally do by tracking ‘valuation levels’), but never seem to have missed the big bus if you look at them over long time periods.

In Indian context, there are few ‘funds’ normally referred as ‘dynamic asset allocation funds’, which are expected to do the same. Has any professional investment manager really done this successfully over the last two or three decades? There is no simple answer to this question. The experience and results are mixed. But, the theory and the research says that ‘it is possible’.

There are, of course, brilliant funds that have successfully managed these asset allocation cycles and delivered superior returns. While it is very clear that very few individual investors have the confidence and comfort to invest 100 percent of their life time savings only in equity, most others (subconsciously!) end up doing ‘self-managed asset allocation’ strategy (choosing between FDs, Equity, Debt, Gold, real estate etc.) and also switching asset classes – mostly unsuccessfully without improving the returns. Incidentally, it also ends up as a tax inefficient way.

So, for a common man (more importantly for any HNI), it is essential that some professional manager takes the responsibility of ‘asset allocation’ and dynamically manage them to deliver ‘superior returns’.

The Chart and the Table (Exhibits –‘A’ & ‘B’), indicates how the Indian equity markets have given divergent returns on a year on year basis. One wishes, if only someone has advised him (or acted on behalf of him) to switch from one asset class and realised the profits and moved out to other asset class.

In this context, it is interesting to see how the various ‘asset allocation Funds’ have delivered returns in India. There again, it will be little unfair to make a judgement based on few years, but only over a period of at least ten years or more. In India, Mutual Funds, PMS and Insurance Companies, do have ‘asset allocation’ funds and the comparative returns generated by them has shown some very interesting results.

In this reference, products offered by insurance companies would be an ideal platform for long term investments. It is time to have a close look at all these asset allocation funds which are tax efficient along with safeguarding systematic savings, asset class switching, risk diversification and generating superior long term returns as well. Not an easy task, but it is time to keep a track of the performance of these investment strategies.



The writer is Chief Investment Officer, IndiaFirst Life Insurance

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First Published on May 25, 2017 01:26 pm
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