Investing in equities is tricky, both for new and seasoned investors. Questions on market valuations, the direction in which they are headed, etc., have no quick, clear answers. This is because the economic environment and the equity markets are very dynamic. Is there a strategy that can take such worries and decisions off the investors' mind?

The wisdom of asset-allocation

Most investors tend to follow the herd. They sell when everyone is selling and buy when everyone is buying. This unplanned and random investment usually results in losses.The asset allocation strategy, however, helps in maintaining discipline and keeps sentiment at bay when it comes to investing decisions. It helps the investor avoid buying in an over-heated markets and selling when the sentiment is poor. For retail investors, the easiest way to use the asset allocation mechanism is through dynamic asset allocation funds.

Dynamic rebalancing

Dynamic asset allocation funds keep emotions aside and follow a `buy low and sell high' strategy. They are structured to invest in equities when the markets are cheap and book profits when markets rise. The switch between different asset classes can be done daily, monthly or quarterly, depending on the mandate of the fund. Dynamic asset allocation funds use various parameters to determine the equity allocation in their portfolio. A commonly used parameter is the price-to-book value.It determines whether to enter or exit equities, by evaluating the market value of equities based on their intrinsic value.The price-to-book value of equities is available on a daily basis to determine whether the market is overvalued or undervalued. Dynamic asset allocation funds track the price-to-book value daily to determine the optimum portion of equities in their portfolio and, accordingly, rebalance their assets.On a particular day, if the book value falls to a predetermined level, the fund buys more equities the next day. If the book value falls again, the allocation to equities is increased further. All this is done within the stated limit for equity allocation in the overall portfolio. The daily rebalancing is done according to a proven yardstick. This rebalancing serves as a handy tool for investors. It eliminates emotions and helps build a robust equity portfolio even in a falling market.

Multi-pronged benefits

Irrespective of whether you choose equity or fixed income, depending on your risk profile and investment preferences, entering the markets through mutual funds gives you the benefits of diversification and professional management.

It could therefore be a prudent strategy to add the flavour of dynamic asset allocation funds to your investments as these funds strive to deliver superior returns, while reducing risk by following the principle of asset allocation.

These funds are suitable for maiden investors or investors with a moderate risk profile. They enjoy lower volatility and tax advantages. Best of all, such funds usually tend to do well in different types of market cycles when one holds them for the long term.