In the world of investments, risks and returns go hand in hand. As a general rule, we can't have one without the other. We can however, aim to strike a balance between growth potential and stability. However, it isn't easy.
For moderate risk investors, equity can prove to be particularly tricky. With its potential to deliver capital appreciation, equity is a vital component of diversified portfolios. However, its inherent volatility can deter investors who are looking for something steadier. But what if we could invest in equity in a manner that optimises returns and risks, and doesn't need us to constantly watch the markets? This is where BAFs can be most useful.
But let's step back - are you a moderate risk investor?
Who is a moderate risk investor?
Moderate risk investors are those who are willing to take some risk in pursuit of higher returns, but not too much. They acknowledge the allure of higher returns but are cautious in their pursuit. Long-term capital appreciation coupled with moderate income generation ranks high on their list of objectives. They prefer a steady and consistent performance over time and are usually wary of high volatility and frequent fluctuations.
Why is Equity Allocation important?
In a nutshell, equity is the asset class most likely to beat inflation in the long run. Ideally, you need to have some equity in your portfolio as a part of your diversification strategy.
Benefits of Equity:
Growth potential: Historically, equity has generated substantial returns in the long term. The compounding effect of reinvested dividends and capital appreciation can lead to impressive wealth accumulation.
Inflation protection: Equity can help investors preserve their purchasing power and protect their wealth from inflation, as it tends to increase in value along with the general price level. As companies increase prices to counter rising costs, the value of equity investments can also rise, safeguarding investors from the erosion of their wealth.
Drawbacks of Equity:
Volatility: Equity is subject to high fluctuations in price and value as it is influenced by various factors such as market sentiment, news, events, earnings, and even geopolitical events. This makes prediction complex, and the market can precipitate steep declines that can unsettle even seasoned investors.
Risk: Equity involves higher risk than other asset classes, as it exposes investors to the possibility of losing their principal or part of it. The inherent unpredictability of the stock market introduces a level of risk that requires careful consideration and risk management strategies.
Uncertainty: The performance of individual stocks can be affected by factors ranging from company financials to industry trends to broader economic shifts. Predicting these variables accurately is an intricate task that adds an element of uncertainty to equity investing.
Introducing Balanced Advantage Funds (BAFs)
BAFs are a type of hybrid mutual funds that invest in both equity and debt instruments. They aim to provide a balance between growth and stability for investors by using various tools and techniques to determine the optimal asset allocation for their portfolio at any given point in time.
Some of these tools and techniques are:
Market valuation: BAFs use various indicators and metrics to assess the valuation of the equity market, such as price-to-earnings ratio, dividend yield, market capitalization, etc. They adjust their equity exposure based on whether the market is overvalued or undervalued.
Market trend: BAFs use various methods to identify the direction and strength of the market trend, such as moving averages, trend lines, chart patterns, etc. They increase or decrease their equity exposure based on whether the market is in an uptrend or a downtrend.
Market volatility: All mutual funds, including BAFs use various measures to gauge the volatility or riskiness of the market, such as standard deviation, beta, volatility index, etc. They reduce or increase their equity exposure based on whether the market is calm or turbulent.
Why are BAFs ideal for Moderate Risk Investors?
BAFs are ideal for moderate risk investors because they offer several advantages, such as:
Dynamic Asset Allocation: BAFs can dynamically adjust their asset allocation according to the changing market conditions and opportunities. This can help them capture the upside potential of equity while minimising the downside risk.
Diversification: BAFs achieve diversification by investing in a mix of asset classes. This diversification spreads risk and mitigates the impact of a single asset's poor performance on the overall portfolio.
Risk Mitigation: BAFs can mitigate the risk of equity by using various tools and techniques such as hedging, arbitrage, derivatives, etc. This can help them protect their portfolio from extreme market movements and shocks.
Professional Management: BAFs are managed by professional fund managers who have expertise and experience in analyzing and selecting the best investment opportunities for their portfolio. They also have access to research and data that can help them make informed decisions.
Learn more about how BAFs can help moderate risk investors achieve the growth they need to meet their long term financial goals here.
An Investor Education initiative by Sundaram Mutual
One-time KYC (Know Your Customer) is mandatory to invest in mutual funds. You can complete your eKYC here: https://invest.sundarammutual.com/. Investors must deal with/invest in only SEBI Registered Mutual Funds. Details are available at www.sebi.gov.in. Complaint Redressal: Investors can reach us on 1860 425 7237 or write to us at customerservices@sundarammutual.com. For escalation, write to grievanceredressal@sundarammutual.com or lodge your grievance with SEBI through their SCORES (SEBI Complaint Redressal System) Portal at https://scores.gov.in. If you are still not satisfied with the redressal from SEBI SCORES, you can further initiate dispute resolution through the ODR Portal at https://smartodr.in/login.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
Moneycontrol Journalists were not involved in the creation of the article.
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