Insulated Portfolio: This Category Both Diversifies And Lowers Volatility Risk

With global cues driving the dynamics of the domestic markets, investors need to ensure that they do not miss out on the diversification, while keeping the allocation within reasonable levels. 'Mother Market' is expected to see some volatility thanks to the noisy Trump administration, according to Kalpen Parekh, chief executive officer of DSP Mutual Fund.

"Most market participants are looking to Trump. We can expect noisy administration for many years, as narratives of de-globalisation are already emerging. We have been beneficiaries of global markets, but the language that US is speaking is bound to create more volatility," he said.

The volatility is not limited to certain markets, commodities or currency, but is to be expected across these asset classes. Now, investors will need to find ways to navigate the volatility and accommodate these movements via diversification.

"Multi-asset funds will buy Indian equities, global markets and commodities. The fund rebalancing will have tax benefit as well when compared to doing it yourself. A well-managed balanced advantage fund is my bias but you could equally do it yourself," said Parekh.

This said, he highlights the need to live through stormy weather sometimes and even situations where multi-asset funds underperform.

In this time, where investors look to include the safe-haven investments, fixed income and more stability based elements into their portfolio, Parekh has re-directed his SIPs to one particular category.

"All my SIPs have gone to multi-asset funds. I do want to gradually increase gold exposure to go over 9%. Indian markets are also expensive than what they should be at. All asset classes except fixed income are sitting on higher value so expect some volatility. So, all my money is going to multi-asset funds," he said. With minimum returns from all asset classes, his reasoning is that a multi-asset fund will help in meaningfully lowering volatility.

Here, the risk of these funds mostly depend on the performance of gold dragging returns. It's also important to note that the US Markets also have risks of their own as one increases their international exposure.

When it comes down to actual asset allocation, its important to re-direct investments to asset classes that make more sense in your portfolio.

"A proper asset allocation, as you never know what side of the coin will flip in advantage and against you," said Mohit Gang, co-founder of MoneyFront.

Active investors can have investment across market cap and styles, he said. Investors who are actively managing their investment will, in this way, tap into better diversified portfolio.

"One can diversify with US equities as they continue to surprise us with upside. Commodity is also a good allocation as the geo-political tension escalates and we are bullish on silver as well," he said.

Gang broke down the ideal allocation for an investor's portfolio. He suggested 10% debt and 5% commodity through Exchange Traded Funds or Fund of Funds. He also recommended 10 to 15% global exposure, while rest of the 70% can be invested into domestic equities, specifically into large, mid and small cap funds, he said.