Multi-Asset Funds: For Stability, Protection & Growth
The classic saying, "Don't put all your eggs in one basket," is most relevant to the world of investment. One of the main principles of investing that people should constantly follow, no matter how the market or economy is doing, is diversification. A common temptation among investors is to overinvest in an asset class, particularly in the one that is performing well at the time. For instance, following the pandemic slump, Indian equities had a stunning recovery, and individual investors actively participated in the rally. One needs to resist this temptation and allow for diversification if one wants to reap the benefits of investing in the long run.
An easy way for an average investor to weather difficult times is to invest in a diverse range of asset classes, including debt, stocks, gold, REITs, InvITs, etc. It’s interesting to note that when these asset classes are plotted across ten to twenty-year intervals, most of them have negative correlation coefficients, or very low correlation coefficients, which indicates that diversifying your investments would help mitigate portfolio drawdowns.
The significance of asset allocation increases as indices approach record highs. During these periods, the equity portion of an investor's portfolio frequently increases, leaving assets susceptible to drawdowns during subsequent declines. Thus, to protect against portfolio downside risk, prudent asset allocation across various asset classes becomes extremely crucial.
Importance of Diverse Asset Classes
Just like the characters in a play, each asset type in a portfolio has a certain role to play. Historical performance data across several asset classes shows that a winning asset class shifts every other year. The equity market usually does well in expansionary economies, while debt often does well in contracting economies. Gold is a valuable inflation hedge; thus it can't be eliminated from the asset mix.
In other words, the key is to put together a portfolio that meets one's needs with the optimal asset allocation and that performs for you in whatever state of the economy you find yourself in. Exposure to different asset classes in appropriate ratios will lead to a more stable and less volatile portfolio, thus facilitating the achievement of financial objectives and goals.
Obstacles Along the Multi-Asset Path
Although we praise asset allocation strategies highly, it is important to remember that an individual investor cannot achieve success by only investing across asset classes and then calling it a day. They have to rebalance their holdings periodically. This may be a difficult process for an inexperienced investor. The primary barrier impeding investors from following asset allocation protocols is their own behavioural biases and their inability to control their emotions of fear and greed. This makes it difficult for them to make informed or wise investing decisions.
Furthermore, individual investors may find it challenging to decide whether to sell or rebalance a portfolio, as well as how much to invest in each asset class. This calls for a specific balance and equilibrium. Every buy and sell transaction made during the rebalancing process is subject to either a long-term or short-term capital gains tax. Thus, rebalancing is a challenging task. At this stage, a multi-asset mutual fund scheme appears to be the one-stop shop for investors that can solve these problems.
Multi-Asset Scheme—An Answer to Challenges?
Multi-asset schemes are hybrid, dynamically managed offerings that suitably meet investors' needs for asset allocation while exposing them to three or more asset classes simultaneously. All of the aforementioned challenges can be avoided with the help of this category structure. Investing in a multi-asset fund assures an investor that risk is spread across multiple assets.
Furthermore, since the fund manager will be allocating assets, the investment will be protected from the feelings of fear or greed that an individual may feel. Since fund-level rebalancing eliminates tax implications, investors do not have to worry about that either. Consequently, investing in a multi-asset fund exposes an investor to a wide range of asset classes, while safeguarding his interests.
History demonstrates that investors who have followed asset allocation strategies during market cycles have consistently become wealthier over time. Investors looking to make a lump sum investment could think about investing in a multi-asset fund, given the present climate. Another option is to use a systematic investment plan (SIP) and incorporate this category fund into your core portfolio.
About Author
Shaili Shah, CEO, Purva Investments
