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Data suggest that the pandemic effect has made investors look into diversifying their portfolios. There is a question of managing volatility and making volatility-proof investments that seems to be on people's minds.

In view of this, Radhika Gupta, the chief executive officer of Edelweiss Asset Management Company (AMC), explained on Sunday why a Balanced Advantage Fund (BAF) or Dynamic Asset Allocation Fund (DAAF) are relevant now.

"Retail investors never make money. I have heard that a lot. They come in at the wrong time, stop SIPs at the bottom, do not hold long enough, overdo small caps, etc. We can choose who to blame, but this happens," she took to Twitter to say.

"And it will happen. India is young in terms of financial awareness. Human behavioural bias is a reality. We all want the growth that comes from equity returns, but losing 20-30% does not feel great. It brings out the worst in us. How do we make equity work?" asked Gupta.

According to her, BAF/DAAF play a crucial role in this scenario.

"By allocating to both equity and debt, and doing the job of shifting allocations automatically, they end up delivering a meaningful part of equity return with lower downside than equity," said Gupta.

She pointed at the numerical dynamics of the risk involved in such investments, which say that BAFs invest 30% to 80% in equities and the remaining portfolio is invested in debt.

Niranjan Awasthi, the head of Product and Marketing at Edelweiss AMC, had earlier highlighted that BAF is unique due to its dynamic nature that allows management of equity levels between 30% to 80% and even 100% for some funds.

"Broadly all BAF models try to achieve one common goal, reduce volatility in returns and more importantly, protect downside when markets correct sharply," he had written.

In reference to this, Gupta then spoke about how asset allocation can be implemented. She said that while the work can be done manually, people may face some challenges.

"1. It is less tax efficient to re-balance than it is in a BAF structure. 2. Automated asset allocation is hard to do as a human, and 3. A lot of us don’t have time to do this," she said.

"I’ve seen some complaints of automated asset allocation models. They aren’t perfect but global experience says they do a lot better than a human trying to market time. At least there is clarity on the investment process," she added.

She went on to say that while BAF is not perfect, it delivers a good return outcome without too much downside. "Good enough for many of us."

"I use BAF as a large-cap substitute in my personal portfolio. Have done a SIP for five years plus with a 14% XIRR and no sleepless nights. This is a very happy outcome for me. I add to this with mid-cap and global funds for more risk and diversification," said Gupta.

"Risk-adjusted return, or simply put earning decent money without too much chaos, is a real investor objective. Any tool including BAF that solves for that, has merits. Our state of financial penetration is so poor that perfection is not the outcome, some progress is," she added.


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