‘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 realise 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.
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, 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.
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.
Mix and match
There are different approaches to multi-asset investing, each with its pros and cons. Within the multi-asset mutual fund offering, there are various types available. If the goal is to generate low-volatility fixed-income equivalent returns, the multi-asset investment approach should focus on fixed-income and equity arbitrage. The other assets serve only as a supplement to the primary goal of capital preservation. Here, gains would be taxed in a debt-like manner.
However, if the goal is to generate growth-like returns, the multi-asset framework should focus on equities while using other assets as counterbalancing forces. Even in this approach, where equities have the upper hand, the priority would be to mitigate volatility. Taxation of gains would be more optimal, given the equity edge.
The benefit of multi-asset investing is that the investment approach is dynamic in terms of asset allocation decisions and allows for choosing the instruments that best play each asset class. Another significant advantage of multi asset investing is that shifts made across asset classes within the fund by the fund manager are not taxed at the hands of the investor, while if one tries to do this on a portfolio level, the tax liability on these changes could be significant.
Over the long term, such an approach leads to better risk and tax adjusted returns.
Choices available
Multi-asset falls under the hybrid category of mutual fund schemes. With over a dozen offerings, this category has more than Rs 34,000 crore in investor assets under management. Given the nature of the fund, it is ideal for both new as well as experienced investors. According to Value Research data, multi-asset funds posted 14.45 per cent in the one-year period ending September 5, 2023. In the 3-year period, the returns are higher at 16.12 per cent.
Given the wide variety of options available, investors should look at the fund management team’s strength when selecting a fund. This is because multi-asset funds carve their niche by surviving in an environment of complicated interplay between multiple assets and investment decisions involved. So, an experienced team that has over the years managed to grow investor wealth is essential.
In conclusion, a multi asset fund deserves a place in every portfolio, both, through the lumpsum and SIP route, in order to optimize risk and return over the long term given market volatility and changes in the economy.
Writer is managing partner at Credel Capital Financial Services LLP