“It won’t be the economy that will do in investors; it will be the investors themselves. Uncertainty is actually the friend of the buyer of long-term values." – Warren Buffet
This quote summarizes how the markets are acting up. The type of volatility that markets are exhibiting makes many investors uncomfortable about investing. There are global factors along with domestic factors that include rising oil prices, inflation, hastening of liquidity tightening, rising Omicron cases. And it is only normal for investors to become more vigilant while investing.
One way to be cautious in such volatile markets is to revisit the portfolio allocation in Equities.
Here are some strategies investors can use in such volatile markets to come out safe on the other side of the rising tide
- Lower the Risk With Value Investing – Value investing is an investment strategy that includes a portfolio of stocks that appear to be trading for less than their intrinsic or book value. Mutual Funds that invest in such options are called value mutual funds. Value investing helps lower the downside or risk on investments.
- Sustainable investing with ESG : To safeguard oneself from the volatility of markets, one strategy is to explore sustainable investing with ESG Mutual Funds. These are funds that invest using environmental, social and governance factors for shortlisting stocks. So, investors can be sure that equities underlying the fund have passed very strong & stringent screening procedures to determine the sustainability of the company or government in the ESG criteria.
- Diversify With Fund of Funds : To simplify the selection of mutual funds from the plethora of options available in the market, investors can use an Equity Fund of Funds. An Equity Fund of Fund is nothing but a mutual fund scheme that invests in other mutual fund schemes. The fund manager in such funds builds a strong portfolio of other mutual funds rather than direct equities or bonds. The portfolio of such funds suits investors across risk profiles & financial goals due to its diversification in many fund categories, market capitalization and investment styles.
- Secure Emergency Money with Liquid Funds : While the markets are unpredictable, what can be managed is how investors approach the need for urgent money by keeping a financial backup ready. This is also called as an Emergency Fund and can be built using a bank savings account and liquid fund schemes. Liquid Funds are debt funds that invest in fixed-income securities such as certificates of deposit, commercial papers, treasury bills, etc., that mature within 91 days. The best part is that Liquid funds do not have an exit load after 7days. These funds are very much suitable for risk-averse investors. Given all this, liquid funds could be useful to park money to meet emergencies, if any.
- Go The Gold Way : Gold as an asset class is historically known to deliver inflation-adjusted returns, historically. So, gold can be used as a tool to cope with inflation. Invest in funds that allow you to invest in gold as an underlying asset. They are called gold funds. Gold funds are open-ended funds that invest in underlying units of a Gold Exchange Traded Fund (ETF), with the primary aim of creating wealth by making use of the potential of gold as a commodity.
With all that being said, the most important strategy investors can use to safeguard their investments in a volatile market. This can be achieved through a prudent asset allocation strategy.
This is something many investors ignore and end up losing money. It helps investors decide how much to allocate to each asset class.
The 12-80-20 Asset Allocation Strategy:
Here’s how investors can can follow a simple strategy to ensure their money is safely allocated across asset classes.
Use the three Building Blocks of Asset Allocation:
- Emergency Block: Before one can start investing, they must set aside at least 12 months of their monthly expenses for emergencies or expenses.
- Portfolio Diversifying Block: And the remaining 20%, can go to a timeless and traditional investment option – GOLD. Because Gold has the ability to be a stable form of money. It also has the potential to store value over longer periods.
- Growth Block: Once that is done, ensure that 80% of one’s mutual fund portfolio is invested in a diversified equity portfolio for long term risk adjusted returns.
Asset Allocation with 12-20-80 Asset Allocation
Suppose an investor has a goal of building a corpus of Rs.50,00,000 for his child’s education. And he has a duration of 10 years for investment.
This example assumes that the investor has already taken care of his emergency fund.
The investor would need to invest ₹ an SIP of Rs. 24,408.7 assuming a rate of return of 10% CAGR.
In the 20:80 ratio, the SIP would be allocated as follows to build a diversified portfolio:
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