Discovering a Secure Fairness Fund = Discovering a Lion that eats grass

Ever seen a lion consuming grass? No, proper?

Lions don’t eat grass.

Equally, there aren’t any fairness funds which might be NOT risky (dangerous). All fairness investments are risky. That’s the nature of fairness investments.

Similar to a lion can’t cease being a carnivore, the fairness investments is not going to cease being risky.

You’ll be able to tame a lion however nonetheless can’t make it eat grass. Equally, via numerous methods, you possibly can cut back losses within the portfolio (no less than in back-tests) however can’t remove the chance of loss in fairness merchandise.

I normally come throughout queries a couple of protected or much less dangerous fairness fund. Consider me, there’s none.

You might say the small cap funds are risky (dangerous).  Extra risky than massive cap funds. So, if you’re on the lookout for a much less dangerous (much less risky) fairness, you should persist with massive cap or multicap funds. Nevertheless, the big cap funds are risky too. And you’ll lose some huge cash if the markets right sharply.

In actual fact, there are low volatility indices that decide up the least risky shares (Nifty 100 Low Volatility 30 index, Nifty Low Volatility 50 and S&P BSE Low Volatility Index). You’ll anticipate that these indices will likely be much less risky. Sure, low volatility indices are much less risky, however that’s relative. Nifty misplaced 38% in March 2020. The low volatility indices misplaced ~30%. The next chart is predicated on month-to-month knowledge and therefore doesn’t mirror the total extent of injury.

safe equity fund

What about Hybrid funds?

Sure, there are hybrid funds, asset allocation funds and balanced benefit funds (dynamic asset allocation funds). And such funds are marketed as much less dangerous different to fairness funds. Often marketed as “Higher than FD returns however much less dangerous than fairness funds”.

I need to say many such funds have carried out nicely.

We mentioned a few in style hybrid funds and a well-liked balanced benefit fund and the findings have been beneficial.

Nevertheless, these funds don’t cut back volatility by choosing a special sort of shares. Such funds merely make investments much less in shares.

And there are a couple of methods to try this.

#1 Allow us to say massive cap shares fall 30% in per week. A fund invests solely 60% in massive cap shares and retains the remaining in Authorities treasury payments.  Clearly, for the reason that fund had solely 60% in shares, it’s going to fall solely 18%.


#2 These funds deliver in several sorts of belongings with decrease correlation (diversification). So, when Indian shares aren’t doing nicely, worldwide shares could also be doing nicely. Or gold could also be doing nicely. Or the opposite belongings is not going to fall as a lot as Indian shares.

Anticipate (1) and (2) in asset allocation funds and hybrid funds.

We mentioned this method on this submit on the right way to cut back portfolio losses. Nevertheless, even with diversification, you possibly can solely cut back the quantum of fall. The drawdowns will nonetheless occur.

I reproduce the efficiency of a portfolio with mixture of Nifty, Nasdaq 100, Gold ETF, and a liquid fund. Low correlations. Low drawdowns in comparison with Nifty 50 however vital drawdowns, nonetheless. Information thought of from March 30, 2011 till December 31, 2020.

Safe equity funds
portfolio volatility
less risky equity funds
international equity


#3 Take an lively name on the asset allocation. Lively calls are normally pushed via proprietary fashions. The intent is to improve publicity to equities when the markets are anticipated to do nicely AND lower publicity to equities when the markets aren’t anticipated to do nicely. Anticipate (3) in dynamic asset allocation or balanced benefit funds.

Once more, such funds don’t remove the chance of loss. ICICI Prudential Balanced Benefit Fund misplaced over 25% in March 2020.  Whereas the non-equity portion was much less affected, the fairness portion will need to have carried out equally unhealthy.

maximum drawdown
ICICI Prudential balanced advantage fund
HDFC Hybrid equity fund
Asset allocation fund

we cut back volatility (threat) within the portfolio?

Broadly, there are 3 approaches.

  1. Don’t take publicity to dangerous belongings. Persist with the consolation of financial institution fastened deposits, PPF, EPF and many others. That could be a fantastic method for very risk-averse traders. Nothing incorrect. Simply that you just might need to settle with low anticipated returns. Be ready to speculate extra.
  2. Convey in several belongings with decrease correlation: Herald home fairness, worldwide fairness, gold, fastened revenue, REITs and many others. The premise is that NOT all belongings within the portfolio will battle on the similar time. Primarily, diversify your portfolio.
  3. Decide up a fund that manages the asset allocation for you: Balanced Benefit, hybrid funds, asset allocation funds.

Solely method (1) eliminates volatility utterly. You’ll by no means see the worth of your portfolio go down by even a small quantity.

Approaches (2) and (3) may give you discomfort throughout unhealthy market phases. Subsequently, whereas diversification and lively funding methods can cut back volatility to some extent, these can’t remove volatility.

Select your asset allocation accordingly

After I construction portfolios for my traders, the selection of funds is sort of the identical for every kind of traders.

Subsequently, each the aggressive and conservative traders are recommended the identical funds. Say, the identical fairness funds E1 and E2. And the identical debt funds D1 and D2.

The distinction is within the asset allocation. And the asset allocation depends upon their threat urge for food.

For an aggressive investor, the fairness allocation (E1 + E2) will likely be say 60% of the portfolio. D1 + D2 will likely be 40%.

For a conservative (or a risk-averse) investor, the fairness allocation (E1+ E2) will likely be say 30% of the portfolio. D1+ D2 will likely be 70%.

Subsequently, focus extra on points corresponding to asset allocation that you could management. The asset allocation have to be according to your threat urge for food.

Don’t chase the mirage of protected fairness funds. Such fairness funds don’t exist.

The submit was first printed in Might 2021.

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