Mutual Fund Investment 2021; Know Benefits and Returns of Debt Funds | Debt funds are less profitable, debt allocation provides stability when valuations are high

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Mumbai17 minutes ago

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During periods of market volatility, HDFC Multi Asset Fund becomes a suitable investment opportunity for an investor, who invests in 3 asset classes. This includes equity, debt and gold.

  • Multi Asset Fund invests in Large Cap, Mid Cap and Small Cap

One of the purposes of debt allocation in asset allocation products such as multi assets is to reduce the volatility of returns. The re-rating of equity valuations over the past few months has indicated a reduction in equity allocation. So while the returns in debt are low, debt allocation still plays an important role in attempting to stabilize investors’ returns, especially when valuations are high and return volatility is high.

Equity investment is above 65%

Amit Ganatra, Senior Fund Manager, HDFC Mutual Fund says that the total equity exposure is maintained above 65% to retain the equity taxation benefit. The scheme invests between 10% to 30% of the total assets in debt resources. In addition, the scheme invests between 10% to 30% of the total assets in gold instruments. They say that unlike equities, gold does not have underlying earnings to decide asset allocation as per valuation parameters.

Given this, we consider the relationship between gold prices and real interest rates based on TIPS (Treasury Inflation Protected Securities) to provide guidance on gold allocation.

reduced equity allocation

Amit Ganatra says that we have reduced the equity allocation. However, an important point regarding equity asset allocation is that it varies with market valuation and not just with level. The equity allocation was around 55% till May 2021. Debt exposure was 20% and allocation to gold-related instruments was 11%.

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Invests in market capitalization multi asset

They say HDFC Multi Asset Fund invests in market capitalization, but at present there are some reasons due to which it is inclined towards large cap. Over the years, we have seen a decent amount of consolidation of market share across industries. This has created a strong investment argument of large influential businesses with massive profits. While some sectors also have mid cap and small cap as major businesses, it is a different matter for large cap.

Works with conservative investors in mind

Since HDFC Multi Asset Fund works with conservative investors in mind. Hence, this fund also relies on large caps with the intention of providing stable returns with low volatility. The main difference between these two categories of valuations of a multi asset fund as compared to a balance advantage fund is the inclusion of gold as part of the overall asset allocation, says Ganatra.

Incorporating the use of gold and derivatives to hedge the equity component during periods of market volatility, HDFC Multi Asset Fund becomes a suitable investment opportunity for an investor, who invests in 3 asset classes. This includes equity, debt and gold.

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