Scared of expensive stock markets?

First impressions often get etched on to our psyche for life. If your first ride on a bicycle led to a fall or you slipped while getting onto a boat, chances are high that you would never think of doing it again. The same holds true for investments. With stock markets hitting new highs, new investors are excited about stocks, but are equally, if not more, concerned about the chances of markets witnessing a steep decline.

New investors must start by taking a safer route to the stock market that provides a tougher shield in case of a crash, while allowing them to reap benefits when stocks rise. Experts tell DNA Money about equity savings funds and dynamic asset allocation or balanced advantage funds, which can serve as good starting points.

As per Securities and Exchange Board of India (Sebi), a balanced hybrid fund is where equity and equity related instruments have between 40% and 60% of total assets. No arbitrage is permitted in this scheme. There is the dynamic asset allocation or balanced advantage category where investment in equity/ debt is managed dynamically. In equity savings schemes, the minimum investment in equity and equity related instruments is 65% of total assets and minimum investment in debt is 10% of total assets. All such categories limit equity exposure to some extent. This approach protects your money during a downfall, compared to a 100% exposure.

"Since these products have a balanced equity approach, they shield investors from huge volatility, while letting them capture any upside. Plus, they are tax-efficient compared to debt products. Once investors have two to three years of positive experience, they can move to products that offer more aggressive equity exposures," said Anil Rego, CEO, Right Horizons.

Dynamic asset allocation

Dynamic asset allocation funds are a good way to start investing. There are about 15 such products in the market, with HDFC Balanced Advantage Fund (Rs 36,415 crore) and ICICI Prudential Balanced Advantage Fund (Rs 27,877 crore) being the largest two. Most of these schemes use an asset allocation model that aims to buy low and sell high. S Naren, ED & CIO, ICICI Prudential Asset Management Company said: "Even though the Indian equity markets are at all-time high, it is important to note that the current rally is being fuelled by only a select few stocks. In fact, since 2015, this is the one of the most concentrated performances the market has seen. We believe, in such a market, asset allocation is one of the most important factors. Considering the current market scenario and the possible volatility owing to global and local factors, we recommend for those looking at lumpsum investment to consider Dynamic Asset Allocation/Balanced advantage category of funds."

Dynamic asset allocation funds use valuation metrics, fundamental or technical parameters to determine the level of exposure to the stock market. When markets are very expensive, equity exposure will be minimum. In periods when market consolidate and valuations become very cheap, portfolios can go to 80-90% in equities.

For new investors who are averse to taking a lot of risk and want low volatility, this is a good alternative. As long as equity exposure is at least 65%, they can get equity fund taxation advantage. The best funds have given 10-11% annual returns in three-year period.

Equity savings

In the last 10-15 years, equity savings funds have emerged as a popular product for first-time investors. There are about 14 competing schemes. The three-year returns are 7 -10% annually. "Equity savings fund is where equity exposure is capped at 35%. One third each in equity, fixed income and arbitrage. So, essentially in bullish markets, you will not get highest returns from equity. But it is a good step for moving away from traditional fixed income instruments like Fixed Deposits or bonds. So, it is a good starting point to come in. You will not get killed with volatility," said Kalpen Parekh, president, DSP BlackRock.

Such funds offer moderate volatility and regular income through investment in arbitrage opportunities and fixed income securities, while aiming to create wealth through moderate exposure in equities. In this way, investors get a diversified portfolio, tactical equity allocation, and benefit of equity taxation. Such funds are positioned between conservative hybrid and balanced advantage funds.

Franklin Templeton Investments has launched Franklin India Equity Savings Fund. Sanjay Sapre, President, Franklin Templeton Investments - India said, "Investors, today, are challenged with increased market volatility, a low-interest rate environment, and tax inefficiency of debt funds over the short-to-medium time horizon (one to three years). They are looking for actively-managed investment products employing strategies that can deliver returns with lower volatility while providing better post-tax returns."

Other options

Some experts feel new investors can employ other strategies to enter equity slowly. One of the ways is to invest in debt funds and transfer only the gain to equity funds. Debt funds give better tax-adjusted returns compared to bank FDs. Another way could be to do Systematic Investment Plan (SIP) in hybrid funds. "Try these for a few years, then increase allocation in pure equity funds. But get hold of a good advisor. A good advisor will help you not go overboard in good times and also prevent you from shunning equity in bad times," said Vijai Mantri, market expert.

For investors with time horizons of more than five years, there is always the case of doing Systematic Investment Plans (SIP). Naren of ICICI Pru AMC said another good investment strategy could be long-term SIPs in small- and mid-cap funds for tenures of above five years. His fund house also believes that when it comes to debt, remaining cautious is key, since they expect debt market to be volatile. "Hence, we recommend investors to invest in short-term debt schemes and ultra-short duration schemes, which can provide both attractive carry and lower duration. Credit risk fund is another attractive category as such funds aim to lock-in higher yield by investing predominantly in AA or below rated corporate bonds," said Naren.

Financial planners say that new investors should actively talk to advisors about lower volatility routes so as to have a good experience. The aim should be to generate more equity returns, but in a more steady manner. "The purpose of such fund products is to reduce the sharpness of fluctuations. You can still come back and participate in the upside of the market, but having a protective shield during downsides is also important to have a good first experience," noted Tarun Sharma, a financial advisor.

Striking a balance:

These categories limit equity exposure to some extent, which protects your money during a downfall

Good for investors who are shifting from traditional fixed income instruments like FDs, as well as those who are not comfortable with volatility