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Volatile Markets
During volatile times, many investors get spooked and begin to question their investment strategies. This is especially true for the novice investors, who can often be tempted to pull out of the market altogether and wait on the sidelines until it seems safe to dive back in. The thing to realize is that market volatility is inevitable. It's the nature of the markets to move up and down over the short term. Trying to time the market over the short term is extremely difficult. One solution is to maintain a long-term horizon and ignore the short-term fluctuations. For many investors this is a solid strategy, but even long-term investors should know about volatile markets and the steps that can help them weather this volatility.
Dealing with volatility
One common theory about a buy-and-hold strategy is that holding a stock for 20 years is what will make you money. If you find a company with a strong balance sheet and consistent earnings, the short-term fluctuations won't affect the long-term value of the company. In fact, periods of volatility could be a great time to buy if you believe a company is good for the long-term.
Things to Keep in Mind -
Choosing to stay invested can be a great option if you're confident in managing volatility.
Let's take an example:
Assume that you have 5 mutual fund portfolios - Portfolio A, Portfolio B, Portfolio C, Portfolio D and Portfolio E.
Portfolio A is a 90% Equity + 10% Debt Portfolio.
Portfolio B is a 70% Equity + 0% Debt + 30% EQUAL AR Portfolio.
Portfolio C is a 60% Equity + 30% Debt + 10% EQUAL AR Portfolio.
Portfolio D is a 20% Equity + 15% Debt + 65% EQUAL AR Portfolio.
Portfolio E is a 100% EQUAL AR Portfolio
EQUAL AR Portfolio seeks to capture at least 60% of Nifty Index upside in a positive twelve month period and restrict losses to less than one fifth of Nifty Index downside in a negative twelve month period. Over the long term, it endeavors to give returns similar to Nifty Index with about one third its volatility.
Illustration
Let's have a look at various portfolios and their historical performance.
EQUITY: This comprises the performance of a portfolio of equity funds. The performance of the funds is an equal-weighted, quarterly rebalanced portfolio of equity mutual funds. The criteria for including funds are as follows:
The fund should have a corpus of at least Rs. 1,000 Cr. as on 29 July 2011 The fund should have been in existence before 1 Jan 2005
DEBT: This comprises the performance of a portfolio of debt funds. The performance of the funds is an equal-weighted, quarterly rebalanced portfolio of debt mutual funds (liquid and ultra short term funds have been excluded). The criteria for including funds are as follows:
The fund should have a corpus of at least Rs. 1,000 Cr. as on 29 July 2011 The fund should have been in existence before 1 Jan 2005
EQUAL - AR Portfolio: The EQUAL - AR (Edelweiss Quant Algorithms - Absolute Return) Portfolio is a multi strategy model portfolio within the following investment parameters:
60% in equity which is hedged dynamically 40% in low risk strategies (cash future arbitrage and money market instruments) which are expected to generate a return of 7% p.a. with a volatility of 3% p.a. A suitable cost element to take care of expenses
The equity part of the model portfolio and the hedging algorithm are generated using multi factor methodology.
Performance of each Portfolio as illustrated above is as follows:
EQUAL - AR Portfolio has given maximum returns with least volatility over a period of time. It also has the maximum number of quarters with positive returns.
The above illustration proves:
 Low risk does not mean low returns!
High risk does not mean high returns!
High long term returns can be generated by capturing the differential on upside as well as downside!
The power of compounding
Low volatility is your friend for long term
Bottom-line: As is evidenced in the results above, a strategy which seeks to have higher participation when the markets are moving up and limits the downside when the markets are correcting will most of the times deliver returns which are aligned to the index but with much lower volatility.
A volatility managed portfolio will always tend to do well over a longer period of time.
Edelweiss Absolute Return Fund (ARF) ^
Edelweiss Absolute Return Fund is an open ended equity scheme that seeks to generate absolute returns with low volatility over a longer tenure of time.
To give the reference to the above illustration, Edelweiss ARF adopts the strategy of Portfolio E.
The Scheme focuses on: High Quality Growth with Low Volatility.
It combines 3 broader level strategies of: Low Risk, Trading in Corporate Actions and Hedged Equity Investing.
Appropriate combination of these strategies endeavors to yield absolute, uncorrelated and consistent returns.
To know more about Edelweiss ARF kindly click on the following link: http://www.edelweissmf.com/downloads/factsheet.htm
To access the EQUAL - AR Calculator kindly click on the following link: http://www.edelweissmf.com/catalogue/knowledge-center/equal-AR-calculator.aspx
^The Scheme is an equity-oriented Scheme. Investors in the Scheme are not being offered any guaranteed /assured returns.
Performance of Edelweiss ARF as on September 30, 2013:
#Based on standard investment of Rs.10,000 made at the beginning of the relevant period. ^Absolute Returns
Since Inception returns are calculated on Rs.10/- invested at inception of the Scheme. Returns shown above are for Growth Option only. Past performance may or may not be sustained in future.
Mr. Paul Parampreet is the Fund Manager of all Equity Schemes and also a Co - Fund Manager of Edelweiss Monthly Income Plan. Mr. Bhavesh D. Jain is the Assistant Fund Manager of all Equity Schemes. Performance of these Schemes is as stated below.
Performance of other Schemes managed by Paul Parampreet & Bhavesh Jain are as follows:
#Based on standard investment of Rs.10,000 made at the beginning of the relevant period. ^Absolute Returns
Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments.
Since Inception returns are calculated on Rs.10/- invested at inception of the Scheme. Returns shown above are for Growth Option only.
Performance of the Dividend Option for the investor would be net of the dividend distribution tax, as applicable.
$Standard Benchmark prescribed by SEBI vide circular dated August 22, 2011.
In case start /end date of the relevant period is a non-Business Day, the NAV of the previous Business Day is considered for computation of returns.
Note: Mr. Paul Parampreet is the Fund Manager of all Equity Schemes and also a Co - Fund Manager of Edelweiss Monthly Income Plan. Mr. Bhavesh D. Jain is the Assistant Fund Manager of all Equity Schemes. For the performance of the same, please refer to the relevant scheme.
* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
Disclaimer: Mr. Seemant Shukla is Head - Sales & Business Development in Edelweiss Asset Management Limited. Views stated above are that of Mr. Seemant Shukla and should not be construed as investment advice. Recipients must make their own investment decisions based on their specific investment objectives and financial positions. Opinions expressed here are not necessarily those of Edelweiss Asset Management Limited (EAML) or any of its Directors, Officers, Employees and personnel. Consequently, EAML, Edelweiss Trusteeship Company Limited or any of its Directors, Officers, Employees and personnel do not accept any responsibility for the editorial content or its accuracy, completeness or reliability and hereby disclaim any liability with regard to the same.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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