ASSET ALLOCATION IS a crucial component of successful investing and is essential to a positive investing experience. It is an evergreen strategy that every investor should adhere to, regardless of market cycles. The adage―‘Do not put all your eggs in one basket’―is a good analogy for asset allocation strategy.
If the basket falls or gets damaged, there is a good chance that all eggs might be useless. In other words, asset concentration can be a very risky proposition at times. It is advisable to diversify investments across asset classes to manage risks and achieve risk-adjusted, stable, and better returns over time.
However, given the fact that all assets go through cycles with different dynamics of valuation, investors find it hard to proportionately allocate their investments. In the process, they develop undue affinity to one asset class, which is dangerous investment behaviour. It is here that schemes such as the multi-asset come to the rescue of investors in an effective way.
Essentially, there are three popular asset classes among the masses: equity, debt and gold. Each has distinct characteristics and importance in one’s investment journey. For instance, equity plays the role of wealth creator, but also goes through phases of consolidation and growth. Despite cycles, the long-term average returns from equities have been around 15 per cent. This makes equity a crucial constituent of an investment portfolio.
On the other hand, debt aims to offer portfolio stability and provides opportunities for consistent returns over a longer time horizon. On an average, debt has offered a return of 7-8 per cent in the long run. Even though equity and debt offer a mix of growth and stability factors, gold has historically acted as a good inflation hedge and often emerges as a protector of the overall investment portfolio.
A multi-asset mutual fund scheme is a solution-based financial product. As per the SEBI scheme category mandate, such a scheme will invest at any given time a minimum of 10 per cent in three or more asset classes. In effect, a multi-asset scheme combines more than three asset classes into a single portfolio that includes investments in equity, debt and gold at any given time. In addition, this category fund may invest in infrastructure investment trusts (InvITs) and real estate investment trusts (REITs). The scheme endeavours to offer long-term returns by managing asset-related risks. This helps investors get optimum benefits from all asset classes while avoiding stress over asset allocation.
Since behavioural finance plays an important role, a multi-asset fund, is well-suited to handle investors’ emotionally driven impulsive investment decisions. Generally speaking, impulsive actions may result in failure of being able to stick to asset allocation, which can at times be detrimental. A multi-asset scheme controls these challenges.
Typically, the average equity allocation is nearly 65-75 per cent, while 20-25 per cent of assets are allocated to debt and the remaining funds are invested in gold and other assets. Historically, it is seen that investors who have maintained their asset allocation during the various equity bull runs without succumbing to “greed and fear” are the ones who have emerged wealthier.
One of the oldest and the largest offerings in this category is the ICICI Prudential Multi-Asset Fund. The fund offers investors exposure to a variety of asset classes through a single fund. The fund manager has the flexibility to invest across market capitalisations and sectors in this truly diversified scheme while aiming to produce absolute returns over a longer time frame. Given the market valuations, for equity allocation, the fund is known to follow a counter cyclical approach and the net equity levels can be in the range of 10-80 per cent.
In light of the expensive equity valuations and rising interest rates amid high inflation, the relevance of staying invested across multiple assets has increased manifold. Various factors like concerns about a global economic slowdown, high inflation, and rate hikes by central banks worldwide have induced fear of uncertainty from a short-to mid-term perspective. At this point, investing in a multi-asset category can get one access to the best of each asset class while limiting the risks associated with asset concentration.
The writer is wealth head, Figital Technologies (p) Ltd.