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Riding out market volatility: A balanced portfolio is the key

Diversification will cushion the portfolio against falling markets.

Riding out market volatility: A balanced portfolio is the key
In volatile times, it is better to invest in balanced advantage funds which invest in a mix of stocks, debt and arbitrage opportunities, depending on the market condition.

Fears of recession in the US on the back of aggressive tightening by the Fed has spooked the markets. The domestic markets are giving in to the pressure of global indices, especially the US, and are likely to remain volatile for some time because of the monetary policy review and the monthly derivatives expiry scheduled during the week.

The volatility has gripped all asset classes — equity, bonds and even gold —and investors are worried that slackening growth would push key economies into recession. Experts say investors should look at their risk appetite, buy quality stocks and invest in mutual funds to beat the volatility. They should look at a balanced portfolio consisting of stocks, fixed income and gold and stick to their long-term asset allocation.

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For long-term investors there are opportunities in such an environment. Alok Jain, founder, Weekend Investing, says, if one is invested in good businesses and is following a framework for his investing, then there is no need to worry as once the dust settles, India should re-emerge as a very strong capital magnet. “Staying with strength in the market remains one of our favourite ways to not predict the market yet ride the wave as and when we get it,” he says.

Diversification cushions the portfolio against any adverse movements in a single asset class and with increasing volatility in the equity markets, investors can look at balanced advantage funds and multi-asset funds of mutual funds to cushion the portfolio against any adverse movements in a single asset class.

Balanced advantage funds

In volatile times, it is better to invest in balanced advantage funds which invest in a mix of stocks, debt and arbitrage opportunities, depending on the market condition. Fund managers of these funds bring down the equity exposure when market valuations are high and increase the equity exposure when the valuations are low. So, you can gain from both rising and falling markets by investing in these funds. However, hold the fund for three to five years to benefit because in the short run these funds can give negative returns.

Multi-asset allocation funds

Experts also suggest investors should look at multi-asset allocation funds to diversify and lower their portfolio risk. Individuals with a moderate risk appetite who want to generate marginally higher returns than debt or fixed deposits, and also limit their equity risk should opt for this fund. Fund managers of these funds book profits from the performing assets and reduce exposure to the underperforming ones. However, investors must evaluate the impact of the allocation as the aim of multi-asset allocation funds is to benefit from the asset-allocation expertise of the fund manager.

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Fixed-income strategy

Spread your fixed deposits across banks and corporates and across tenures, ranging from 180 days to over five years. Look at deposits with a mix of large banks, small banks, and AAA-rated companies to get better average returns. As interest rates are likely to rise, target short tenures now, say, six months to a year. Once the interest rates peak out, lock-in for longer tenure of five years and above.

For corporate deposits, keep an eye on the company and its financial health to minimise the risks to investment. In fact, AAA ratings will give lower returns but your money is the safest here and you will get your principal and interest paid on time.

Road ahead

* Balanced advantage funds can cushion your portfolio against adverse movements in a single asset class

* For fixed deposits, go with a mix of large banks, small banks, and AAA-rated companies to get better average returns

n Opt for multi-asset allocation funds to get steady long-term returns

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