Dynamic asset allocation funds outperformed markets amid coronavirus scare

While a few funds did well, HDFC Balanced Advantage failed to beat the Sensex that fell 20.3% between Feb-12 to Mar-12

Kumar Shankar Roy Mar 14, 2020

dynamic asset allocationInvesting legend Warren Buffett once said unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market. This is a quotable quote used by most people in the financial products businesses. But when stock markets fall by 20% in just about a month, even seasoned investors are scared. In such times, dynamic asset allocation has come out as a strategy to limit the downside. The last one month period ended March 12 has once again showed that dynamic asset allocation funds are great at shielding investors from turbulence in stock markets. Read on to know more.

Dynamic asset allocation

As coronavirus pandemic gripped the world infecting and killing thousands, equity markets crashed. Indian benchmark index Sensex tanked 20.3% in the one month period, as coronavirus concerns, fear about banking system and dashed hopes of economic recovery sparked a massive bout of spelling. During such times, dynamic asset allocation funds are expected to perform better. Dynamic asset allocation funds invest in a mix of debt and equity, and increase/decrease their asset allocation depending on their view of the stock markets. So, how have dynamic asset allocation funds performed in the recent bear run?

The good news is that dynamic asset allocation funds out-performed markets amid coronavirus scare. As against Sensex’s 20% drop in last one month, top-performing dynamic asset allocation funds such as Principal Balanced Advantage Fund (-5.09%), BOI AXA Equity Debt Rebalancer Fund (-5.50%), Edelweiss Balanced Advantage Fund (-7.57%), Shriram Balanced Advantage Fund (-7.96%), Motilal Oswal Dynamic Fund (-7.98%), DSP Dynamic Asset Allocation Fund (-8.58%), Axis Dynamic Equity Fund (-8.63%) etc. have done much better than broader markets. Other dynamic asset allocation funds that are in the top-10 list are L&T Balanced Advantage Fund (-8.71%), Tata Balanced Advantage Fund (-8.95%) and UTI Unit Linked Insurance Plan (-9.61%) have done quite well.

Among the largest dynamic asset allocation funds, HDFC Balanced Advantage Fund performed as badly as Sensex that fell 20.3% between Feb-12 to Mar-12. However, other biggies like ICICI Prudential Balanced Advantage Fund (-14.29%), Kotak Balanced Advantage Fund (12.19%) and Nippon India Balanced Advantage (-10.21%) managed to limit downside quite well, shielding investors from the equity market jolt.

Every dynamic asset allocation fund is free to use its own methodology for deciding the asset allocation. A fund could use various valuation metrics such as the price to earnings, price to book value or any other in-house developed proprietary models to assess the equity asset allocation. Most fund houses keep the equity allocation between 30-80%, but when valuations are high, equity exposure is reduced while debt exposure is hiked.

Performing well during a short period such as a month helps a fund’s more longer term returns. Clearly, losing less during a downturn helps dynamic asset allocation funds to generate more returns. In the last 3-month period (ended March 12, 2020), the Sensex is still down 19.3% but best-performing dynamic asset allocations funds like BOI AXA Equity Debt Rebalancer Fund (-2.77%), Edelweiss Balanced Advantage Fund (-3.74%), Principal Balanced Advantage Fund (-4.07%) and Axis Dynamic Equity Fund (-5.14%) look much-better placed. Such downside protection abilities help reflect in the 1-year performance as well. The Sensex is down about 12.7% in last 12 month period, but top performers like Motilal Oswal Dynamic Fund, Edelweiss Balanced Advantage Fund, and DSP Dynamic Asset Allocation Fund are actually in the green in this period, eking out positive point to point returns.

While this article is about point to point returns of investors for periods upto 1 year, the out-performance/under-performance of dynamic asset allocation funds show how such a category is quite useful for a portfolio. It is not just important to win big during phases of momentum alone; investors must have funds that can limit downsides when everything related to pure equities is falling apart. In that vein, dynamic asset allocation funds should be used to complement other investing strategies for an investment portfolio.

 1-month return of Dynamic Asset Allocation Funds

Fund Name 1 Mt (%) 3 Mth (%) 6 Mth (%) 1 Yr (%)
Principal Balanced Advantage Fund -5.09 -4.07 -2.32 -4.31
BOI AXA Equity Debt Rebalancer Fund -5.50 -2.77 1.18 -7.66
Edelweiss Balanced Advantage Fund -7.57 -3.74 1.21 1.69
Shriram Balanced Advantage Fund -7.96 -6.22 -2.09 N.A.
Motilal Oswal Dynamic Fund -7.98 -5.85 1.47 2.18
DSP Dynamic Asset Allocation Fund -8.58 -5.33 -0.54 1.49
Axis Dynamic Equity Fund -8.63 -5.14 -2.10 -1.20
L&T Balanced Advantage Fund -8.71 -6.95 -3.20 -2.31
Tata Balanced Advantage Fund -8.95 -7.33 -3.30 -1.72
UTI Unit Linked Insurance Plan -9.61 -5.56 -1.44 -7.16
Sensex -20.3 -19.3 -11.6 -12.7
For the period ended March 12, 2020

RupeeIQ take

During bull markets, a large number of investors enter equities through mutual funds for the first time. These new investors consist people who move money from fixed deposits and as such are not much used to volatility of the equity markets. In sharp corrections such as the one we saw in the last few days, a portfolio with a dynamic mix of debt and equity would face lower volatility than a pure equity fund portfolio. So, dynamic asset allocation funds are ideal for newbie fund investors. As you select a dynamic asset allocation fund, try to look at various periods of upturn and downturn in stock markets to see how funds perform vis-a-vis others. Do not make investing decisions based on a single phase.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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