Volatility is an integral part of equity investments. It’s unavoidable. Without it, you will not make any returns in the stock market. We all welcome positive volatility while despise a downfall. However, with the right asset allocation strategies, we can shield ourselves to a large extent from this downside. Asset allocation plays an important role in tackling market turbulence. Lets understand what exactly is asset allocation:

There are three main asset classes—equities, fixed-income, and cash and equivalents—they all have different levels of risk and return, so each will behave differently over time. Asset allocation is the process of deciding how much money to put in which asset class.

By achieving the right asset allocation we can balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.

Traditionally the ideal ratio has always been 60% in equity & 40% in debt and other classes, however this number is not sacrosanct and changes as per ones age, risk tolerance etc.

The point to drive home is that you must park at least 30 to 40% of your investments in asset classes that de coupled from the capital market. To do so select asset classes like debt funds, NCDs, Bank FDs (to park your emergency corpus) & wealth plans offered by insurance companies

Let’s understand how we can evaluate & select these instruments

Debt Funds / Hybrid Funds

Debt funds are mutual fund schemes which invest in fixed income generating securities such as Commercial Papers (CP), Certificate of Deposit (CD), Corporate Bonds, T-Bills, government securities and other money market instruments.

Balanced advantage funds 

They invest in a mix of stocks, debt, and arbitrage opportunities. These funds will decide their equity exposure depending on the key market ratios or in-house parameters. They will invest less in stocks when the market is very high or valuations are stretched & vice versa.

Hybrid Funds

They invest in a equity & debt instruments depending upon their investment objective. Suitable for investors seeking diversification by keeping a part of their portfolio de-linked from the market.

Secured NCDs

Investment bonds are a way to raise money. When you purchase any type of bond (government, or a corporate bond) you are essentially lending money to the issuer. In return, the issuer promises to pay a specified rate of interest during the life of the bond. The issuer also repays the face value of the bond when upon maturity of the term. They help you with steady interest income, & principal protection. They can bought either in the secondary market or directly from the issuer during a new offer.

Wealth Plans

Saving schemes or plans are an important part of financial planning and long-term financial stability. These plans are offered by insurance providers. Under such plans the insured usually pays premium for say 3/5/10 years and then receives fixed guaranteed tax free pay-outs either at the end of the policy term on a lumpsum basis or on a pre-structured monthly/annual basis. The key point to remember here is that these inflows are fixed, guaranteed & tax free, making them an excellent choice for achieving a balanced asset allocation.