By Shiraj Jacob,Director,SRR Asset LLP
Over the past year or so, there have been significant gyrations in key indices as volatility was the name of the game due to a host of factors, including high inflation, geopolitical tensions, increasing interest rates, and a slowdown in most developed economies.
Investors may, therefore, be quite anxious about deploying fresh funds in equities, given their rich valuations and the numerous local and global economic challenges. It is here that having a suitable asset allocation and, more specifically, a multi-asset strategy helps.
By investing in multiple asset classes—equity, debt, gold and more—you can diversify your portfolio, reduce risks, and generate optimal risk-adjusted returns over the long term. Since there is little correlation between asset classes, a multi-asset strategy works well when used in the right combination.
Given below is how a multi-asset strategy works and why it must form a part of your portfolio building exercise.
Investing in non-correlated assets
A host of factors decide the price movements in various asset classes—equity valuations, interest rates, inflation, geopolitical events, commodity price fluctuations, corporate earnings, business cycles economic growth, and so on. Therefore, one or more of stocks, bonds and gold investments would find favour with markets. In general, equity, debt and gold have the following roles in your portfolio.
Equity: This asset class is generally a mainstay in a portfolio due to its propensity to generate substantial returns over a long period of time—10 years or more—and create significant wealth. It is the essential asset class for supporting all of your financial goals.
Debt: Fixed income provides stability and certainty to your portfolio, with steady returns. It is suitable for income generation and diversification.
Gold: The yellow metal serves as a great inflation hedge and a shock absorber in times of geopolitical tensions or economic slowdowns.
The movements of these three asset classes have very low or negative correlation with each other. In other words, they move at varying paces at different points in time. For example: In 2008, during the global financial crisis, the Nifty fell 51.3%, but MCX gold prices rose 26.1%, and the CRISIL Short Term Bond Fund Index returned 9.5%. In 2011, the Nifty declined 23.8%, while gold rallied 31.7%.
When there was a pandemic, in 2020, gold prices rallied 28%, even as the Nifty delivered 16.1%. In the subsequent year, the Nifty rose 25.6%, even as gold prices corrected by 4.2%. Given the diverse asset class performance, investors must consider multiple asset classes for better management of portfolio risks, as a mix of non-correlated assets helps reduce portfolio volatility.
When investors deploy funds across many assets according to their risk appetite, time horizon for goals, etc., they spread their risks well and lessen their dependence on one single asset for returns. Investors using a multi-asset strategy can allocate funds to specific asset classes, based on their requirements and market conditions. Finally, when there are multiple assets in your portfolio, the impact of a broader market downturn on individual assets is much better contained. This way, your portfolio suffers less value erosion.
A multi-asset fund for investors
Since the strategy involves taking a call on multiple assets, an active fund manager would be most suited for your requirements. In this regard, ICICI Prudential Multi-Asset Fund emerges as one of the leading names in this category, thanks to its consistent performance across market cycles. This can be gauged from the fact that on a rolling five-year basis from October 2002 to November 2022, the fund has given a healthy 17.2% return. The fund's history over the past 20 years is notable for never having produced losses or negative returns over rolling five-year periods.
This has been made possible by the fund’s smart assets shuffling in response to market conditions. So, from 73% equity exposure in May 2020, the fund brought down the equity exposure to 56% as of November 2022. The fund also invests in gold exchange-traded funds (ETFs), silver exchange-traded commodity derivatives, and debt. Apart from this, the covered call option strategy (in which the investor selling or writing the call option has an equal amount of underlying assets) helps the fund generate returns, especially in range-bound markets.
If you are an investor looking to deploy a lump sum, this fund or this category can be taken into consideration in the prevailing market conditions.
