How To Beat Market Volatility Through Asset Allocation By Mr Biswajit Das, Mutual Fund Distributor

Does market volatility give you sleepless nights, or do you panic every time the market stumbles? In that case, what you need to get right is asset allocation. Asset allocation is the investment strategy where you diversify your portfolio by investing in different asset classes such as equities, debt, gold, real estate etc. By diversifying investments, the impact of market volatility on overall portfolio tends to get minimised.

However, before you embark on asset allocation journey take into consideration the following factors:

Understand Risk Tolerance

To begin with, know yourself, i.e. understand your risk tolerance. Risk tolerance is the risk you are willing to take when investing in different investment options.

Your risk tolerance should ideally be in sync with your financial goals, time horizon, and your ability to digest the short-term fluctuations in the market without losing sleep. Knowing your risk helps you to choose the right investment options and avoid making decisions based on your emotions.

Asset Correlation

Now, is the time to embark on deciding on asset allocation. Here, it is important to understand the working of various asset classes and their correlation with each other. Equity, debt, gold, and real estate are some of the main asset classes. Equity investment options such as stocks and equity mutual funds carry the highest risk. However, over the long term, equity as an asset class tends to outperform all other by a wide margin. Debt is another popular asset class that aims to protect capital and offer regular income. Gold is considered as a safe haven asset and acts as a hedge against inflation.

The beauty of having all of these asset classes, is that they are no co-related in nature, i.e. they do not all move in the same direction. For instance, when the Russia-Ukraine conflict or pandemic broke out, equity world over faced a sharp correction. At that time, debt held steady while gold prices rallied. So, if an investor has all of these three asset classes in a portfolio, the downside faced in equities would have been cushioned by the rally in gold and steady returns in debt. In effect, an investor is better placed to beat market volatility by adhering to asset allocation.

Rebalance

Over time, the desired asset allocation proportion tends to get distorted due to market movement. In case if there was a rally in equities, the allocation to equities would have increased and vice versa. As a means to address this distortion, it is important to rebalance once in a while. Moreover, with time the risk tolerance and goals of an individual too might change. In that case, it is essential to rebalance your asset allocation to align with your goals so that you are best placed to beat market volatility.

Asset Allocation Funds

If all the above mentioned activities is overwhelming you, then an alternative approach is to seek the help of a financial advisor who can guide through each of these steps. The other option is to invest in a mutual fund scheme which dynamically takes care of asset allocation. Here, an investor can consider options from the hybrid schemes wherein through a single fund, an investor gets access to multiple asset classes.

If the aim is to invest in equity and debt asset classes, basis one’s risk profile, they may choose categories like the balanced advantage, conservative or aggressive hybrid funds or equity savings fund to name a few. If you are looking for gold allocation as well, then multi-asset category fund can be of help.

In each of these categories, the allocation to various asset classes are dynamically managed basis the changing market environment. As a result, there is in-built rebalancing which can help beat market volatility over time. Hence, you need not worry about rebalancing. If an investor in the current market conditions, is considering lump sum investment, then asset allocation schemes can be a good starting point.

To conclude, market volatility is a reality of equity investing and an investor cannot escape it. So, the option is to adhere to asset allocation and negate the impact of market volatility on the portfolio.