EQUITY MARKETS have been choppy during this year. After rallying for the better part of the first nine months of 2024, equities corrected sharply in October and November, before taking off once again on rally mode in December.
Bond markets have rallied and India’s 10-year g-sec is now at a yield of sub 6.75 per cent from over 7.2 per cent a year ago. Gold prices have had a great run, rallying more than 27 per cent so far this year.
Europe and the US have already started reducing interest rates, while India is yet to start trimming rates, though it has cut cash reserve ratios for banks. Meanwhile, geopolitical tensions and trade wars continue to post challenges.
Domestic equity markets continue to be expensive and recent corporate earnings have been underwhelming.
As an investor, it is important to realize that these are dynamic circumstances and therefore investing must be done prudently.
As with all times asset allocation―spreading investments across equities, bonds and commodities (gold etc.)―is critical, more so during volatile times such as what currently prevails.
MULTI ASSET INVESTING
To achieve your financial goals, setting out the right asset allocation pattern is very important. Before doing so, it is critical to understand the role that the three key asset classes play in an investor’s portfolio.
Equity: The most important part that accounts for the bulk of your allocation, at least for the first couple of decades of investing, is equity. It is the key wealth creator with phases of growth, consolidation, and correction.
Fixed income: Bonds generate stable cashflows for investors and steady returns with low volatility. In the period March 2007 to December 2023, the Crisil Composite Bond Fund Index delivered an average 7.3 per cent on a 5-year rolling return basis.
Gold: The yellow metal is a good inflation hedge. As gold prices are denominated in US dollar, domestic gold can also serve as a hedge with the rupee-dollar exchange rate dynamics.
From CY 2013 to CYTD 2024, equities (Sensex) were the best performers in five calendar years. In the same period, gold was the best asset class in five calendar years and debt in two instances.
Thus, depending on the corporate earnings, local and macroeconomic factors, different asset classes deliver at different times.
TAKING THE FUND ROUTE
There are several benefits in choosing multi-asset funds as a part of your investments and as a part of asset allocation.
Multiple assets via a single product: By choosing multis-asset funds access to stocks, bonds and gold, investors can access several assets through a single product, making it simpler for them.
Fund manager decides suitable asset allocation: Rigorous internal models help fund managers decide the proportion to be invested in different asset classes. The best allocation pattern is possible for investors which they find challenging to construct by themselves.
Diversification via uncorrelated assets: Stock and bond movements have near-zero correlation―they move almost independent of each other. Equity and debt as also debt and gold have negative correlation, so they move in opposite directions.
Investors seeking a reliable investment option may consider the ICICI Prudential Multi-Asset Fund. As one of the oldest offerings in its category, the fund boasts an impressive track record of over 22 years. Since its inception, it has delivered a robust CAGR of 21.20 per cent (as of November 29, 2024). Additionally, the fund has posted an impressive one-year return of 22.68 per cent, along with strong three-year and five-year CAGR returns of 19.73 per cent and 20.61 per cent, respectively.
The writer is a mutual fund distributor.