"Don't keep all eggs in one basket" is a popular adage in the investment world. Simply put, concentrating your investments in a single asset class ties your fortune to the vagaries of that asset class. Investors increasingly realize that having a well-balanced and structured portfolio is key to long-term returns and peace of mind. This is why multi-asset investing as a single-window and all-weather solution has gained prominence.
A Cautionary Tale: Sir Isaac Newton and the South Sea Bubble
While discussing the perils of putting all your investments in one asset class, the story of Sir Isaac Newton serves as a cautionary tale. Newton, a brilliant mind of his time, initially invested a modest sum in the South Sea Company. Upon making a tidy profit, he sold his shares. However, he watched the stock price continue to climb and, consumed by a fear of missing out(FOMO), invested a far larger sum than before. Eventually, the South Sea bubble burst, and Newton lost the equivalent of millions in today's money. Even the greatest minds are not immune to the psychological traps and market risks that come with a lack of diversification.
Story of Multiples
Due to the dynamic nature of global markets and economic cycles, it is impossible to consistently invest in the winning asset class. Also, each asset class may have prolonged cycles of outperformance and underperformance. Historical data also demonstrates that no single asset class performs consistently well. An investor who invests 100% of their hard-earned money in a single asset class leaves their investment vulnerable to the asset’s ups and downs. During good times, this may pay off, but during bad times, such a strategy may not suit the investors’ risk appetite. This can cause a suboptimal return experience.
Multi-Asset Investing in India
Multi-asset investing, which is best routed through a multi-asset mutual fund in India, can provide diversified exposure to various asset classes through a single fund. The mandate of such a fund is to invest in three or more asset classes. Typical asset classes where multi-asset allocation funds invest are equity, equity arbitrage, debt/fixed income, gold, silver, international equities, REITs, and InvITs. As a result, investors who wish to lower portfolio volatility and aim for greater predictability of returns should consider a multi-asset offering as a core part of their portfolio.
Advantages of Diversification
By virtue of having a diversified portfolio, multi-asset funds help reduce risks. Diversification works best when the constituents of a portfolio do not move in tandem as a result of a macroeconomic or market development. Different assets move in response to various factors and thrive in different types of market conditions. Instead of focusing on one or two asset classes, multi-asset investing is about finding the right asset allocation mix across a number of assets and fine-tuning exposure as and when required. These are the important factors that will determine your actual return experience. By spreading your investments across different assets, you are essentially betting on the entire team rather than a single star player.
The Nuts and Bolts: Different Approaches to Multi-Asset Investing
Within the multi-asset mutual fund landscape, investors can choose from different strategies based on their risk tolerance and financial goals. Some focus on fixed-income and equity arbitrage for capital preservation, while others lean toward equities for more aggressive growth. Regardless of the specific approach, the ultimate objective is to balance the portfolio in a way that maximizes returns while minimizing risks.
Choices Available
Multi-asset mutual funds in India offer a plethora of options, managing more than Rs 34,000 crore in investor assets. According to Value Research, these funds have given returns of 14.45% in the one-year period ending September 5, 2023, and 16.12% in the three-year period. When choosing a multi-asset fund, consider the track record and expertise of the fund management team, as they navigate the complex interplay between different assets and market conditions.
In a nutshell, whether you're looking for a lump-sum investment or planning to start a long-term SIP, a multi-asset fund could be your ticket to financial stability and growth.
